South West Water Annual Performance Report and Regulatory Reporting Southwestwater.Co.Uk Bournemouthwater.Co.Uk

2017 South West Water southwestwater.co.uk Annual Performance Report bournemouthwater.co.uk and Regulatory Reporting South West Water Limited 00C Annual Performance Report and Regulatory Reporting 2017

WELCOME

Welcome to South West Water

We are South West Water Our reservoirs South West Water is the combined entity covering the original South West Water and Bournemouth Water areas, following the merger of the two companies in 2016. Both identities have been retained by the Company in their original operating areas and there are separate customer and stakeholder commitments for 2015-20 in each area. We recognise the importance of customers and other stakeholders understanding what they can expect from us and being able to place trust and confidence in the data, information and publications we provide.

We provide water and wastewater services to South West Water customers in Cornwall, Devon and small parts of Dorset and Somerset.

15,300km of water mains 15,600km of waste water network 1.7m residents 682 Our business outcomes treatment works Clean, safe and reliable Reliable wastewater drinking water services

Available and sufficient Protecting the resources environment

Responsive to Benefiting the customers community

Resilience in extreme Fair charging conditions

southwestwater.co.uk/report2017 South West Water Limited Annual Performance Report and Regulatory Reporting 2017 01 Annual Performance Report

ANNUAL PERFORMANCE REPORT Regulatory Reporting Welcome 00 Highlights 02

Introduction from the Managing Director 04 Overview Creating sustainable value 06 2016/17 performance overview 08 Performance summary 10 Our performance Clean, safe and reliable drinking water 12

Available and sufficient resources 16

Longham Lakes Responsive to customers 18

Resilience in extreme conditions 20

Reliable wastewater services 21 Protecting the environment 24 Benefiting the community 26 Fair charging 30 We provide water services to Bournemouth Financial performance 32 Water customers in parts of Dorset, Hampshire and Wiltshire REGULATORY REPORTING Governance 40 2,831km Assurance 50 of water mains Risk and compliance statement 53 Accounting disclosures 57 0.5m Auditors’ report 60 Technical Auditors’ Report 65 residents Regulatory reporting 67 Price review and other 7 segmental reporting 72 treatment works Performance summary 84 Additional regulatory information 90 Cost allocation and transfer pricing 101

Creating sustainable value Go to page 06 to read more

Our performance Read more on pages 12 to 37

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HIGHLIGHTS

Achieving our 2015-20 Business Plan

We manage the region’s drinking water and wastewater in an integrated way ‘from source to sea’, delivering high quality services in the most efficient and sustainable 20 years without way possible. water restrictions in South West Water area and none in the Bournemouth area since privatisation

Highlights Read more on page 16

41.1 Revenue (£m) 562.5 506.4 £562.5m 2015/16: £506.4m 2015/16 2016/17

9.9 Operating profit (£m) 234.3 209.8 Higher customer satisfaction

£234.3m Read more on page 18 2015/16: £209.8m 2015/16 2016/17

6.3 Profit before tax (£m) 172.9 154.4

£172.9m Excellent drinking 2015/16: £154.4m 2015/16 2016/17 water quality

Read more on page 24

2015 – 2020southwestwater.co.uk/report2017 South West Water Limited 04 Annual Performance Report and Regulatory Reporting 2017

INTRODUCTION FROM THE MANAGING DIRECTOR

Building on strong foundations

Welcome to our Annual I am pleased to report that the newly merged Performance Report and water business of South West Water and Regulatory Reporting for 2016/17 Bournemouth Water maintained strong operational and financial performance in 2016/17, delivering top quartile performance in many business areas and making significant investments in improvements to benefit customers and the environment. Customers in both service areas continued Governance changes to enjoy high quality drinking water with no water restrictions. South West Water achieved In April 2016 Pennon Group introduced a revised significant improvement in leakage control, framework for governance and decision-making water supply interruptions were reduced which is operating well and allowing the pursuit and customer satisfaction continued to of synergies across the Pennon Group (further increase, with the number of written customer details are provided on page 44). complaints reduced by almost a third in both areas. The new approach is delivering efficient and transparent decision-making while preserving Progress was also achieved in the wastewater the degree of regulatory independence required side of the business. Following a targeted in our licence. programme of capital improvements and staff training, the number of compliant works was During the year we published our Risks, its highest to date, although further work is Strengths and Weaknesses statement providing required in order to meet our stretching future robust assurance over our reporting. Following Dr Stephen Bird targets. Similarly, we successfully reduced the feedback from our customers and other Managing Director number of serious or significant (Category 1 stakeholders, we will be publishing a Customer and 2) pollution incidents and work continues Summary version of our 2016/17 performance towards achieving our ambition of eliminating at the end of July 2017, alongside a Summary 98.6% such incidents by 2020. of Assurance. Improving bathing water Preparing for market reform quality A safe place to work Above all else, South West Water is committed Ahead of the opening of the Non-Household to ensuring the health, safety and wellbeing retail market on 1 April 2017 a significant 98.4% of all those working for and with us. Following amount of work was undertaken as part of our ‘MarketReady’ programme to prepare both the Best ever wastewater the tragic death of a colleague at Falmouth Wastewater Treatment Works in December wholesale and retail arms of the water business numeric compliance 2013, for which the Company was fined £1.8m for the new market. in April 2017, we have carried out a major programme of work to update health and To provide retail services to business 86 and 82 safety procedures and policies. Staff training customers, Pennon Water Services Limited (a has been improved and we have invested in Pennon Group Plc subsidiary) was established Increasing Bournemouth new equipment and technologies, particularly as a separate legal entity which is now based and South West Water’s those designed to ensure the safety of those in Bournemouth and was the vehicle created SIM1 scores working alone. We now regard our lone worker to facilitate South West Water’s exit from the protection as industry-leading. retail market.

Furthermore, the creation of a new Pennon During the year we addressed all procedural, Group role of Director of Safety, Health, systems-based and legal requirements as set Quality and Sustainability (SHQS) reflects the out by the new market codes and entered importance attached to ensuring the highest ‘shadow operation’ from October 2016, ahead 1 Service Incentive Mechanism health and safety standards across all of of full market opening. We are pleased with the Pennon’s business and operational areas. success of the ‘cultural shift’ that has taken

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place across the company, facilitated by our South West Water remains Regulatory Reporting extensive training programme with over 500 committed to providing support hrs of training provided over a 12 month period to more than 2,300 employees and partners. for those customers in vulnerable circumstances. Financial performance South West Water once again outperformed its Targeted improvements have been made in regulatory contract to achieve a sector-leading how we deal with service issues – including the RORE (Return on Regulated Equity). The introduction of a rapid response team for visible company maintained its strong momentum leak repairs – in addition to increased usage of in controlling total expenditure (Totex) with data analytics and investment in our Exeter- cumulative savings of £129m over the first two based call centre staff and systems. We are also years of K6 (2015-2020). taking steps to improve our digital platforms to improve the lines of communication we have We continued to deliver synergies from our with our customers. acquisition of and merger with Bournemouth Investing in innovation Water. This year the focus was on front-line South West Water remains committed to Construction is progressing well on the functions, with the integration of back-office providing support for customers in vulnerable new state-of-the-art Mayflower Water and support services having been completed circumstances. We are proud of our industry- Treatment Works in Plymouth, which last year. The targeted c.£27m of net synergies leading range of affordability measures is the largest single item of capital over K6 are on track. In addition, during the including the social tariff which we are now expenditure in our current five-year plan. year, South West Water participated in an rolling out in the Bournemouth area. We have ongoing review of central corporate shared also introduced a new initiative in 2016/17, Once commissioned in 2018 the Works, services targeted to drive value through developed with the charity MIND, designed to which will serve Plymouth and the efficiency, synergy and the pursuit of best increase the awareness of our call handlers surrounding South Devon area, will be practice throughout the Pennon Group. to issues around customer debt caused or exacerbated by stress or other mental one of only two plants in the world to health issues. use transformational ceramic membrane ODI rewards filter technology. During the year, as we As part of its K6 regulatory contract, South reached the halfway point in the build we West Water has 23 Outcome Delivery Protecting the environment were on time and on budget. Incentives (ODIs) and Bournemouth Water has Overall our environmental performance has 10, which attract potential financial rewards or progressed well this year following targeted penalties. Operational performance for the year investment in a number of key areas. We continued to improve with a net ODI reward of continued to implement a programme of water and wastewater services regulation. £3.6m (£5.5m cumulatively over two years). wastewater treatment improvements and We will shortly be publishing our updated long- increased monitoring to prevent potential term vision to 2050, setting out our strategic South West Water maintained stable reliability failure. While further progress is required, we priorities while remaining focused on delivering and serviceability across all four areas of achieved our best ever wastewater treatment a first-class, innovative and efficient service operations. Bathing water quality, water performance (as measured by both numeric characterised by reliability, responsiveness restrictions, interruptions to supply and and descriptive compliance). and resilience. leakage all resulted in rewards for the year. I am also pleased to report that bathing The past year has seen significant change Disappointingly, performance in wastewater water quality remained high in 2016/17 with within the company and the wider industry pollutions and external flooding, although 141 (98.6%) of the 143 bathing waters tested and it is testament to the hard work and improved compared to the prior year, fell all passing the tougher new standards professionalism of our people that we have below our targeted commitment and resulted introduced last year. The two failures were continued to perform extremely well during in a penalty. unrelated to the performance of South West this period. On this point, I would like to thank Water assets and we continue to work with our staff and our partners for their ongoing Delivering for customers stakeholders including landowners, councils, support and commitment. We continue to focus on improving the services and conservation groups to reduce the risk of customers receive and this has been reflected bathing water pollution from factors such as in the ongoing trend of improvement in South agricultural run-off and highway drainage. West Water’s SIM (Service Incentive Mechanism) Dr Stephen Bird, score, which increased to 81.6 this year (78.6 Outlook Managing Director, 13 July 2017 in 2015/16). Bournemouth Water’s SIM score As we prepare for the PR19 five-year review was one of the highest in the industry at 86.3 of pricing and investment, South West Water (2015/16: 86.2). continues to be well-positioned and fully engaged with Ofwat’s programme for future

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OVERVIEW

Creating sustainable value

We manage our business to deliver value. Our business model is underpinned by our commitment to creating and maintaining a sustainable business.

Our business model What we do Underpinned by strong governance, our We abstract • maintenance of dams including upgrading spillways business model is designed to ensure we: water from the • maintenance and upgrades of pumps and other assets (e.g. pipework) • deliver value for money services while environment • generation of renewable energy using hydropower, solar panels and keeping bills affordable to customers wind power. • meet or exceed the high quality standards set by our regulators We clean it and make • maintenance of existing treatment works • safeguard our existing investments (e.g. it safe to drink • improvements to the clean water treatment processes networks, treatment works, operational • investment in Granular Activated Carbon (GAC) and other assets and systems) technological advancements to improve efficiency and quality. • minimise the impact of our activities on the environment We distribute it to • ensuring that clean treated water reaches our customers at the same • ensure fair returns for our investors our customers level of quality as when it leaves our treatment works • are able to meet future challenges such • ensuring reliability of supplies as climate change, resilience, population • preventing leakage and bursts. growth and new legislation. Our customers rely • ensuring customers get excellent service when they contact us on the services we • ensuring billing and payment systems work smoothly provide • making the most of new technologies and digital communications (e.g. website and mobile apps).

We collect • maintenance and upgrades of sewerage infrastructure (network and wastewater other assets) • investment to reduce flood risk and associated pollution incident risks.

We treat it and • maintenance and improvement of wastewater treatment assets as well return it to the as wastewater pumping stations environment • wastewater treatment improvements to protect bathing and shellfish water quality • bio-resource recycling • energy generation from treatment processes through Combined Heat and Power (CHP) and solar panels.

Our strategic focus areas

Water Service Environment Supplying clean, safe and reliable Being responsive to our customers' Providing reliable wastewater services drinking water and ensuring available needs and enabling the resilience of our and protecting the environment. and sufficient resources. services in extreme conditions.

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For the benefit of

Customers S Our customers benefit from our quality, L r er fair and reliable service. A te v N a ic IO W e T Shareholders & investors A R E Our strong business model ensures P O that shareholders and investors get

a fair return.

A I F

i Regulators & stakeholders

n Creating N

A a Our strong engagement with regulators

n I F Sustainable n c and key stakeholders ensures clear e e visibility of our business approach.

& Value m n E o c r Employees o i n v Our employees are highly valued and o n m E are key to our success. y Suppliers & contractors P eop nity The relationship with our suppliers le & Commu and contractors is fair and benefits the local economy.

People & Community Finance & Economy Supporting and benefiting our Ensuring our charges are fair; delivering community. strong financial performance.

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OVERVIEW

2016/17 performance overview

Strategic focus areas Our business 2015–2020 outcomes Our strategy

Water Innovation, partnership working and the Clean, safe and reliable drinking water use of new technology are key to delivering Reliable, clean and reliable, high quality drinking water supplies. safe supplies Targeted investments are made to ensure we Available and sufficient resources meet or exceed our regulatory and legislative obligations.

See pages 12 to 17

Service Meeting our customers’ needs and ensuring Responsive to customers value for money is critical to our success Responsive to our as a business. customers’ needs and priorities We are committed to improving the quality Resilience in extreme conditions and responsiveness of the services they depend on.

See pages 18 to 20

Environment The health of the natural environment Reliable wastewater services is essential. Environmentally sustainable actions and In every aspect of our operational activity initiatives we seek to minimise our impact on the Protecting the environment environment while making enhancements to it where possible.

See pages 21 to 25

People and Our people strategy is designed to attract, community Benefiting the community retain and develop the right people with the right skills. Supporting our people and local communities We are also committed to making a positive contribution to the communities we serve.

See pages 26 to 29

Finance and Attracting low-cost financing, maintaining the economy Fair charging confidence of our investors, and generating additional returns for outperformance. Resilient business and service Optimising efficiency and making prudent investment decisions to ensure our charges are fair.

See pages 30 to 37

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2016/17 performance Regulatory Reporting

South West Water Compliance with water quality standard • 20th year without water restrictions • significantly reduced contacts due to taste, SWW: 99.96% / BW: 99.98% smell and colour • 100% security of supply Leakage level • stable asset reliability. SWW: 82 / BW: 19 (megalitres/day) Bournemouth Water • 99.98% compliance with water quality Durations of interruptions to supply standard • 0.89 customer contacts /1,000 customers (hours per property/year) for taste and appearance. SWW: 0.221

South West Water Customer overall satisfaction • 95.5% of drinking water and 89.9% of wastewater operational contacts resolved first time 89% • further improvement in SIM to 81.6 (2015/16: 78.6). Supplies interrupted due to flooding Bournemouth Water on our sites • Visible leaks being repaired more quickly (number/year > 24 hours) • improved SIM to 86.3 (2015/16: 86.2). 0

South West Water Wastewater numeric compliance • 98.4% numeric and 99.4% descriptive wastewater compliance 98.4% • stable asset reliability • reduction in category 1&2 pollution incidents Category 1 & 2 Pollution incidents • decrease in sewer flooding. Bournemouth Water 4 • on target to meet 2020 energy reduction targets.

South West Water Bathing waters compliant with • No beaches failing higher standard due to South West Water assets EU standards • 6 RIDDOR incidents in the year. 98.6% Bournemouth Water • Community and volunteering programme Key risks continuing under South West Water programme Principal Risks and • 3 RIDDOR incidents in the year. Uncertainties are disclosed in the Company’s Annual Report on pages 23-30. South West Water Household customers paying • more than 28,000 customers assisted a metered bill How we operate and by water poverty schemes manage risks • 61% of customers satisfied with value SWW: 81%/ BW: 69% Strong corporate governance for money (up 2%). and a comprehensive risk management strategy are Bournemouth Water designed to ensure that • Strong performance on debt recovery. South West Water can deliver safe, reliable and sustainable operations.

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OVERVIEW

Performance summary

South West Water has a range of targets across its two operational areas. 4 of 5 2016/17 targets met There are a range of performance (5 targets in 2020) targets across the South West Water and Bournemouth Water areas.

These include those with annual targets and those with only 2020 commitments. 2 of 2 2016/17 targets met Of the annual targets South West Water delivered 14 out of the 23 targets and (4 targets in 2020) Bournemouth Water delivered 5 out of the 5 targets for 2016/17. We are on track to deliver those commitments with 2020 only targets. 4 of 6 The 'Our Performance' section of this document (on pages 12 to 31) summarises 2016/17 targets met performances against all of our targets (6 targets in 2020) (including those which have only 2020 targets). This section includes commentary on additional South West Water KPIs, not included in the performance committee target summary on this page. On track No 2016/17 targets Where performance currently falls short of target, measures are described to bring 1 target in 2020 performance back onto the committed performance levels. 1 of 2 2016/17 targets met (5 targets in 2020) 2 of 6 2016/17 targets met (15 targets in 2020) 1 of 1 2016/17 target met 2 targets in 2020 0 of 1 2016/17 targets met (2 targets in 2020)

southwestwater.co.uk/report2017 South West Water Limited Annual Performance Report and Regulatory Reporting 2017 11 Annual Performance Report Regulatory Reporting 2 of 2 1 of 1 2016/17 targets met 2016/17 targets met (2 targets in 2020) (2 targets in 2020) 2 of 2 On track 2016/17 targets met No 2016/17 targets (5 targets in 2020) 1 target in 2020 On track On track No 2016/17 targets No 2016/17 targets 3 targets in 2020 2 targets in 2020

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OUR PERFORMANCE

Clean, safe and reliable drinking water

Providing customers with an uninterrupted supply of fresh clean water that not only meets the highest water quality standards but is also free from any unwanted taste, smell or colour.

1. Compliance with water quality 6. Compliance with water quality standard(1) £- standard(1) £-

99.96% 99.97% 99.96% 99.94% 100.00% 99.98% 2016 Target 2016 Target 99.98 or greater 99.97% or greater

2020 Target 2020 Target 99.98% or greater 100.00% 2014 2015 2016 2014 2015 2016

2. Taste, smell and colour contacts 7. Customer contacts: taste and (Nr/1,000 population) £+/- appearance £-

3.42 0.89 2.92 2.70 2016 Target 0.73 2016 Target 3.90 0.56 1.24

2020 Target 2020 Target 3.00 1.23 2014 2015 2016 2014 2015 2016

3. Interruptions to supply (hours per property) £+/-

0.419 0.381 2016 Target 0.242 0.221 2020 Target 0.200 2014 2015 2016 Key 4. Number of mains bursts KPI Type

1,530 1,571 £+/- Financial 1,328 (penalty or reward)

£- Financial 2020 Target (penalty only) 1,350 2014 2015 2016 Rep Reputational

KPI KPI 5. Asset reliability £- Processes 16/17 Target Result Stable Stable Stable Stable 2014/15 2015/16 2016/17 2020 Target Met Stable On target Pipes 16/17 Target Stable Stable Stable Stable Not met but in 2014/15 2015/16 2016/17 2020 Target penalty deadband Stable (1) As measured by Mean Zonal Compliance Not met

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1 – Drinking water quality 2 – Taste, smell and Regulatory Reporting We continued to maintain high standards of colour contacts drinking water quality during 2016. South West In addition to achieving excellent water quality, Water achieved 99.96%, which although high, is we are committed to minimising any taste, smell marginally lower than our target. Bournemouth or discolouration issues. Water achieved 99.98%, which is higher than the target. In 2016, the number of contacts relating to these issues continued to fall (by 5%) and we remain The strong performance can be attributed to on track to meet our 2020 target. Progress our ongoing investment in the maintenance is being achieved through a combination of and improvement of both our drinking water upgrades to water treatment works and the treatment processes and our mains network. flushing of drinking water mains. We continue to invest to meet our targets. We continue to be focused on using innovative Work continues on time and on budget for the technologies and systems to better model, construction of the state-of-the-art Mayflower manage and maintain our drinking water water treatment works which will supply network. Plymouth and the surrounding area. 3 – Interruptions to supply Other notable investments during the year included new processes using granular The average duration of supply interruptions per activated carbon (GAC) and ultraviolet property for South West Water was lower than disinfection (UV) commissioned at three 2015/16. This performance delivered a financial additional treatment works. These new reward for the year compared to the penalty processes will improve drinking water incurred in 2015/16. taste and odour and help secure long-term compliance with our water quality obligations. This improvement has been delivered by increasing our speed of response to bursts and South West Water also continues to target leaks and harnessing innovative repair/supply improved drinking water quality through restoration techniques. our ‘Upstream Thinking’ programme of catchment management. More information We are working with our partners to ensure that can be found at www.southwestwater.co.uk/ resourcing is appropriate across the distribution upstreamthinking. alliance, improving the forecasting of work loads and sharing resources more effectively.

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OUR PERFORMANCE

Clean, safe and reliable drinking water continued

4 – Number of mains bursts It is our goal to avoid interruptions, including those caused by mains bursts, wherever Our target is to continue to possible and to take steps to minimise the impact of any interruption that does occur. maintain our assets’ ability to Interruptions can happen for a variety of deliver reliable service as this reasons, ranging from planned maintenance and improvement work on the water mains is fundamental to a robust and through to leaks, bursts and factors beyond reliable operation and providing our control such as the impact of third party a consistent service to construction work. The number of bursts increased in the year. our customers. South West Water is addressing this increase, to ensure the 2020 target is met. The use of ‘root cause’ analysis is being enhanced to reduce repeat asset failures. In addition we are improving the effectiveness of our pressure management techniques to 'calm' the network. 5 – Asset reliability Our target is to continue to maintain our assets’ ability to deliver reliable service. This is fundamental to a robust and reliable operation and providing a consistent service to our customers.

The technical assessment of long-term reliability uses a range of measures established under our long-standing serviceability assessment processes.

In 2016/17 South West Water’s asset reliability continued to be stable against all of these measures. 6 – Drinking water quality Bournemouth Water achieved 99.98% compliance with the Drinking Water Inspectorate regulations as measured by Mean Zonal Compliance. This success can be attributed to our ongoing investment in the maintenance and improvement of both our drinking water treatment processes and our mains network. In recent years, treated water from the Avon and Stour rivers has been put through Ultraviolet (UV) plants as a final barrier against chlorine-resistant, micro- organisms such as cryptosporidium.

99.98% compliance exceeds our committed performance level and continues to represent one of the highest standards of quality in the industry. It is based upon an extensive and rigorous testing system at our treatment works and service reservoirs, as well as samples taken at customers’ homes.

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7 – Customer contacts: taste Regulatory Reporting and appearance Customer contacts relating to the taste, appearance and odour of drinking water remained within our committed performance level but increased compared to last year. This rose from 0.73 per thousand customers to 0.89 per thousand customers (equating to less than one contact per thousand customers).

Most concerns of this nature do not have water safety implications and are of short duration. In South West Water we are focused on using innovative technologies and systems to better model, manage and maintain our drinking water network.

£6m Invested in Tottiford Water Treatment Works

GAC investment at Tottiford Water Treatment Works South West Water has invested £6m at Tottiford Water Treatment Works, near Bovey Tracey, to install six new granular activated carbon filters, a new pumping station and a state-of-the-art ultraviolet disinfection system.

We continued to maintain high standards of drinking water quality during 2016.

Granular Activated Carbon (GAC) is a specially engineered porous material with a large internal surface area – just one teaspoon has the same surface area as a football pitch.

Due to its large surface area and special surface chemistry it can remove both natural and manmade organic matter sometimes present in Fernworthy, Kennick, Trenchford and Tottiford reservoirs, which supply the water treatment works.

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OUR PERFORMANCE

Available and sufficient resources

Avoiding restrictions on the water our customers use while managing and delivering the region’s supplies as efficiently as possible.

1. Number of restrictions 5. Large scale interruptions placed on customers £+/- (properties improved) £+/-

None None None 2016 Target 0 0 2014/15 2015/16 2016/17 None 2020 Target None 2020 Target N/a 12,000 £+/- 2. Leakage (Megalitres/per day) 2014 2015 2016

84 84 82 2016 Target 6. Average length of supply 84 interruptions (mins/property) £-

2.5 2020 Target 2.3 84 1.9 2016 Target 2014 2015 2016 4.4

2020 Target 3. Time taken to fix Rep 4.4 significant leaks (Days) 2014 2015 2016

2.83 2.80 2.23 7. Serviceability £-

Stable Stable Stable 2020 Target 2016 Target <2 2014 2015 2016 Stable 2020 Target Stable Rep 4. Security of Supply Index (SoSI) 2014 2015 2016

100 100 100 Key 8. Per capita consumption (l/h/d) Rep Type

143.9 £+/- 138.4 133.6 Financial 2020 Target (penalty or reward) 100 2014 2015 2016 £- Financial 2020 Target (penalty only) 136.0 2014 2015 2016 Rep Reputational

KPI KPI 9. Leakage (Megalitres/per day) £+/-

20.9 19.6 19.0 Result Met 2020 Target On target 20.0 2014/15 2015/16 2016/17 Not met but in penalty deadband Not met

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1 – Water resources 5 – Large scale interruptions Regulatory Reporting South West Water customers enjoyed We have committed to further improving unrestricted supplies for a 20th consecutive performance in respect of supply interruptions, year in 2016 while Bournemouth Water focusing on reducing the likelihood of large- maintained its record of no water restrictions scale interruptions to the water supply in the imposed since privatisation. Bournemouth Water area. Our business plan to 2020 includes schemes to extend resilience by Prior investment in reservoirs, the use allowing properties to be fed by an alternative of pumped storage and supply network trunk main in the event of failure for more improvements continue to ensure adequate than 12,000 additional properties in the supplies. The Company’s supply-demand Bournemouth and Wimborne areas. balance is forecast to remain positive throughout the K6 (2015-20) period and We remain on track to meet this target of no investment in new raw water sources is 12,000 properties, with construction already expected to be required within the 2040 underway in 2017/18. planning horizon.(1) 6 – Average length of supply Regardless of our resource position, we interruptions continue to promote with our customers the wise use of water. There has been a slight increase in the number of unplanned interruptions of over three hours 2&3 – Leakage in 2016/17 to 1,006. While this is greater than the 667 reported in 2015/16, it remains lower Improved performance in managing our network than in 2014/15 and in line with year-on-year led to a significantly improved leakage result of fluctuations. 82Ml per day in South West Water and 19.0Ml per day in Bournemouth water, outperforming All interruptions are always carefully managed our target and delivering an ODI reward. and there is an emphasis on completing work as soon as possible to restore supplies. The result reflects investment in innovative Regrettably 757 of the 1,006 unplanned approaches to network management including interruptions related to a single mains burst real-time pressure management and online in West Wellow. This burst occurred overnight network modelling. and we isolated the leak and restored supply to all customers impacted prior to the peak During 2016/17 we also invested in measures morning demand. to better record and analyse night-time water consumption across households and 7 – Servicability of assets businesses and also focused on improving our detection rates in urban areas. Furthermore, Consistent with the position in the South during the year we undertook a comprehensive West Water area, Bournemouth Water’s asset restructuring of the leakage field teams and reliability also continued to be deemed stable introduced specialist support for customers against all of these measures. We currently with leakage and/or high consumption issues. have the capacity to supply significantly This should further improve our performance more water than we currently require in the over the forthcoming year. Bournemouth area and our investment plan is therefore mainly maintenance focused. 4 – Security of supply index (SoSI) 8 – Per capita consumption South West Water’s achievement of the Bournemouth Water’s per capita consumption maximum SoSI score reflects the balance struck increased against 2015/16 performance. between supply and demand and the minimised This is due, in part, to the reallocation of a risk of water restrictions being placed on number of large blocks of flats to a household customers. categorisation following non-household retail market opening. Other factors can affect the Our average customer consumption of 136.1 calculation on a year on year basis but we litres per day (per capita) is one of the lowest expect relative stability to resume over time. in the industry and we support this through the (1) Based on our Water Resources Management Plan published promotion and installation of free meters (which in 2013. generally encourage more efficient water use).

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OUR PERFORMANCE

Responsive to customers

Dealing with our customers’ requests, problems and queries quickly and efficiently and ensuring the service they receive represents value for money.

1. Service Incentive Mechanism £+/- 5. Repairing visible leaks £-

81.6 79.2 80.0 74.8 78.6

54.0

2020 Target 2020 Target 85.0 85.0 2014/15 2015/16 2016/17 2014/15 2015/16 2016/17

2. Customer satisfaction Rep 6. Service Incentive Mechanism £+/-

90 89 89 87.5 86.2 86.3

2020 Target 2020 Target 90 89.0 2014/15 2015/16 2016/17 2014/15 2015/16 2016/17

3. Customer satisfaction 7. New customer relationship with value for money Rep management system £-

57.8 59.0 61.0 0.683

0.336 2020 Target 2020 Target 90 N/a 1.18 2014/15 2015/16 2016/17 2014/15 2015/16 2016/17

4. Operational contacts Key £+/- resolved first time (%) Type

93.5 94.8 95.5 £+/- 87.1 88.2 89.9 2016 Target Financial 92% (penalty or reward)

92% £- Financial (penalty only) 2020 Target 2014/15 2015/16 2016/17 95% Rep Reputational 95% Drinking Water KPI KPI Wastewater

Result Met On target Not met but in penalty deadband Not met

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1,2&3 – Customer satisfaction 4 – Resolving contacts 6 – Customer service (SIM) Regulatory Reporting During 2016/17 we made significant progress first time During a year in which Bournemouth Water in improving our overall SIM(1) performance, Our goal is to prevent issues and problems operations were being integrated with South increasing South West Water’s overall score occurring, avoiding the need for customers to West Water, there was good performance from 78.6 last year to 81.6. contact us. However, when a customer does in customer service across both areas. need to get in touch, our aim is to resolve Bournemouth Water has consistently performed Furthermore, we saw a 9% decrease in all contacts as quickly and professionally well against the SIM measure of customer unwanted telephone contacts and a c.30% as possible. service which now stands at 86.3 (2015/16: 86.2). reduction in written complaints. In 2016/17 we made good progress in increasing Written complaints have reduced by c.30% South West Water’s overall customer the percentage of customer contacts resolved in 2016/17. satisfaction remained high in 2016/17 at 89% first time with overall performance reaching 94%. (2015/16: 89%). Satisfaction with value for Our Drinking Water team performed especially There are detailed plans in place to ensure money also continued to show year-on-year well, exceeding both the 2016/17 and 2020 further complaint reductions, a focus on improvement at 61% (2015/16: 59%). South targets with 95.5% of contacts now being resolving customer contacts first time and West Water has pledged that the average resolved first time. integrating systems to ensure further customer household bill will rise by less than Retail service enhancements are possible such Price Index (RPI) inflation over 2015-20. Building on the improvements made last year, as rolling out of ‘My Account’ functionality the volume of wastewater contacts resolved first (currently available in the South West Water We recognise that listening to our customers time has also increased from 88.2% to 89.9% and area) and paperless billing. and understanding their service expectations further initiatives are planned to achieve the is vital. During 2016/17 we delivered a series of 2020 target of 95%. 7 – New customer relationship initiatives including ‘co-creation’ workshops, management system customer satisfaction surveys and focus 5 – Repairing visible leaks groups. The results have helped us identify and The new billing system for the Bournemouth implement a wide range of customer service Having been identified as a key customer Water area has been fully implemented and was improvement measures, including: concern we have focused on finding and fixing fully operational for the whole of 2016/17. visible leaks more quickly. • increased staff training to help ensure a Depreciation of the system (reflective of the tailored service to meet the individual needs However, not all leaks can be dealt with amount invested) is in line with the target set of each customer promptly as some require road or lane closures by Ofwat of £1.18m cumulative depreciation • investment in our call centre to respond to for the work to be carried out safely. We liaise by 2020. and resolve customer inquiries faster closely with the highways authorities so that • increased support for tackling potential work can be done at a time that causes the leakage issues least amount of disruption. • faster response to visible leaks and external sewer flooding This year we increased the percentage of visible • simplifying customer materials and account leaks fixed within seven days to 80% and we processes (e.g. payment plan renewals) remain well-positioned to meet our 2020 target • the introduction of a dedicated team to of 85%. tackle unresolved issues • improved services for customers in vulnerable situations (including a programme of staff training delivered alongside the mental health charity MIND).

Work is also underway to improve our online and digital platforms so that customers can access services more quickly and easily.

(1) A key indicator of customer service performance for the water business is the service incentive mechanism (SIM), which Ofwat uses to compare the performance of water companies. The SIM score is calculated against a qualitative element (based on a customer survey) and a quantitative element that takes into account, among other things, the number of complaints received in writing or by phone.

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OUR PERFORMANCE

Resilience in extreme conditions

Making sure the water and wastewater services Key we provide can withstand the potential impacts of extreme weather and security threats. Type £+/- Financial (penalty or reward)

£- Financial (penalty only) Rep Reputational 1. Supplies interrupted due to flooding on our sites £+/- KPI KPI

0 0 0 Result Met 2020 Target 0 On target 2014/15 2015/16 2016/17 Not met but in penalty deadband Not met

1 - Protecting operational sites Security from flooding South West Water aims to maintain a long term resilient and With our changing climate and unpredictable reliable service for customers. Securing our sites and operations weather we need to ensure our sites are is key to this aim. sufficiently protected and that systems are in place to enable a rapid recovery should a In line with a statutory requirement under the Water Act, we have flooding event occur. It is our aim to find the long held a strategy in line with the ‘Security and Emergency most sustainable solutions to dealing with flood Measures Direction’ (SEMD), which plans to mitigate the risk using a multi-agency, integrated approach. likelihood and impact of deliberate, malicious acts of criminal damage, theft, extortion and terrorism. Our SEMD programme is During 2016/17, a relatively dry year, there were externally audited. zero interruptions caused by flooding. Cyber security threats are increasing in scale and complexity A number of ongoing activities are underway and the number of attacks against industrial control systems in order to maintain this position: (SCADA) and the theft of customer data is becoming increasingly significant. • working closely with the Environment Agency and other stakeholder groups, including local South West Water have implemented an Information Security councils, to identify and mitigate potential Strategy reflecting separate corporate (IT) and operational (OT flooding issues or SCADA) systems each with specific threats and requirements. • using advanced computer modelling This strategy is risk based and utilises a combination of: techniques and historical data for planning purposes and driving increased protections • Certification to ISO27001:2013, the Information security at key sites standard, its required controls and audit requirements • investment in temporary flood barriers for • National Cyber Security Centre (NCSC) Best Practice Guides rapid deployment and the development of and Defra’s Cyber Security Strategy. relevant contingency plans • reviewing flood risk assessments to Further details on South West Water’s approach to resilience underpin PR19 investment proposals can be found in a June 2017 ‘Resilience’ publication available • contributing to the National Flood Risk at southwestwater.co.uk. Review 2016.

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Reliable wastewater services

Ensuring our customers can rely on us to remove and Regulatory Reporting dispose of wastewater safely and efficiently, and that the likelihood of sewer flooding affecting homes and businesses is minimised.

1. Internal sewer flooding £+/-

182 189 165 2016 Target 148

2020 Target 135 2014/15 2015/16 2016/17

2. External sewer flooding £+/-

3,702 3,504 3,179 2016 Target 3,380

2020 Target 3,200 2014/15 2015/16 2016/17

3 Sewer blockages and collapses KPI

8,693 8,914 8,777

2020 Target 9,200 2014/15 2015/16 2016/17 Key 4. Odour contacts £+/- Type 333 £+/- 278 2016 Target Financial 230 366 (penalty or reward) £- 2020 Target Financial 300 (penalty only) 2014/15 2015/16 2016/17 Rep Reputational

5 Compliance with KPI KPI sludge standard Rep

100 99.94 100 Result 2016 Target 100 Met 2020 Target On target 100 2014/15 2015/16 2016/17 Not met but in penalty deadband Not met

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OUR PERFORMANCE

Reliable wastewater services continued

6. Asset reliability £- Processes 2016 Target Stable Stable Stable Stable 2014/15 2015/16 2016/17 2020 Target Stable Pipes 2016 Target Stable Stable Stable Stable 2014/15 2015/16 2016/17 2020 Target Stable

1,2&3 – Sewer flooding 2016/17 saw a decrease in the number of both internal and external sewer floodings ‘Think Sink!’ campaign launched in 2016 compared with the previous year, however the pace of performance improvement has not Every year South West Water’s wastewater team deals with been as great as we had targeted within our around 8,500 blocked sewers across Devon and Cornwall, which 2015-20 business plan. cost about £4.5m to unblock.

In line with our strategy we continue We continue to target a reduction in sewer flooding and to prioritise sewer maintenance and pollution through the promotion of responsible sewer usage improvements in those areas most at risk with our customers. of flooding. By doing so we have more than halved the number of repeat internal floodings Following the success of our award-winning ‘Love Your Loo’ – eight incidents in 2016/17 compared with campaign, which targeted communities in areas with a history of 18 in 2015/16. sewer blockages, we launched a new ‘Think Sink!’ campaign in December 2016, with support from the Environment Agency. We continue to work towards faster investigation and response times to any issues. This encourages customers to ‘take the pledge’ and avoid To achieve this we have made changes to the disposing of fat, oil and grease (among the major contributors operating model within our customer services to blockages) down the drain. and networks team while also investing in new equipment. Dedicated advisers have been talking to customers and spreading the Think Sink! message in towns and cities across Furthermore, we continue to target a reduction the South West Water region including Exeter, Cullompton, in flooding through customer education, Truro and Falmouth. most notably our ‘Love Your Loo’ and ‘Think Sink’ campaigns which are designed to raise awareness about sewer misuse.

Our ‘Downstream Thinking’ programme of catchment management also seeks to reduce flooding risk through the application of sustainable drainage schemes and landscape management.

All of these initiatives are being implemented as we look towards our 2020 target.

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4&5 – Odour issues Regulatory Reporting Whilst there was an increase in the number of odour contacts during 2016/2017, our performance remains within the annual target threshold and is on track for the 2020 target.

A key factor behind this year’s increase relates to operational challenges at Countess Wear Wastewater Treatment Works in Exeter responsible for 111 of the contacts (36% of the overall total) received. 82 of these contacts were in July and August 2016 alone, a period of significant dry weather.

To reduce the likelihood of odour issues affecting customers living in the Countess Wear area we already are carrying out improvements to the primary tanks at the treatment works, due for completion in 2017. 6 – Bio-resource recycling Every year we recycle around 38m tonnes of biosolids (sludge) for use as an organic fertiliser on agricultural land.

Sludge is produced through conventional anaerobic digestion processes and lime treatment systems.

Biosolids recycling is a closely regulated practice. We operate effective quality assurance processes designed to ensure that these regulations and guidance are fully met and a high quality product is supplied to farmers. Following a slight dip in compliance in 2015/16 South West Water implemented operational practices that returned our 2016/17 performance to 100%.

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OUR PERFORMANCE

Protecting the environment

Minimising our impact on the world around us and taking steps to protect and enhance it where possible.

Key Type 1. Wastewater treatment works numeric compliance £- 6. Sustainable abstractions £+/- Financial (penalty or reward) Number of EA/WFD Rep 98.40 improvements required £- 96.10 2020 Target Financial 95.80 0 0 0 0 (penalty only) 2014/15 2015/16 2016/17 Rep 2020 Target Reputational 100 EA water stress status £- KPI 2014/15 2015/16 2016/17 Moderate Moderate Moderate KPI 2016 Target 2014/15 2015/16 2016/17 2. Wastewater treatment Moderate works descriptive compliance £- 2020 Target Result Moderate 99.09 99.40 Met 91.40 2016 Target 7. Carbon emissions (ktCO e) Rep On target 100 2 Not met but in 93.5 98.6 2020 Target 85.9 penalty deadband 100 67.2 2014/15 2015/16 2016/17 56.7 61.8 Not met 2020 Target 3. Wastewater treatment 48 works population equivalent 2014/15 2015/16 2016/17 102 sanitary compliance Rep Drinking Water

99.20 99.13 99.92 Wastewater 8. Energy from renewable sources (%) Rep 2020 Target 100 7.14 2014/15 2015/16 2016/17 10. Energy used in water delivery 5.75 5.61 (kwh/Ml) £- 4. Wastewater pollution incidents £- 2.40 2.75 2020 Target 650.25 Cat 1&2 2016 Target 1.42 592.00 12.2 589.45 3 7 4 0 2014/15 2015/16 2016/17 7.8 2014/15 2015/16 2016/17 2020 Target 0 Drinking Water 2020 Target Wastewater 530 Cat 3&4 2016 Target 2014/15 2015/16 2016/17 228 315 222 252 9. Catchment management Rep 2014/15 2015/16 2016/17 2020 Target 11. Supporting a natural water 198 environment £- 7,568 5. Drinking water pollution incidents £- Yes Yes 5,673

Cat 1&2 2016 Target 4,942 2016 Target 1,056

847 2020 Target 0 0 0 0 741 Yes 8,154 2014/15 2015/16 2016/17 2020 Target 2014/15 2015/16 2016/17 1,400 2020 Target 0 N/a Number of acres (cumulative) Yes Cat 3&4 2016 Target 2014/15 2015/16 2016/17 3 5 9 2 Number of farms (cumulative) 2014/15 2015/16 2016/17 2020 Target 2

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1,2&3 – Wastewater 7&10 – Energy and carbon treatment standards Our overall emissions were reduced in 2016/17

A marked increase in the number of by 7.3 ktCO2e, with the relatively dry autumn wastewater treatment works achieving and winter seeing a decrease in the amount compliance was achieved in 2016, following of power needed on the wastewater side of a programme of focused improvements the business. Regulatory Reporting undertaken over the year. Conversely the weather did result in increased Out of 301 sites, five were non-compliant, energy usage for drinking water pumping in including Falmouth Wastewater Treatment the South West and increased energy demands Works. Due to the Falmouth works serving in the Bournemouth area, however emissions a large population its failure impacted were also offset due to a change in the UK’s the figure for compliance as measured by grid electricity emissions conversion factor. Population Sanitary Equivalent Compliance With less reliance on fossil fuels the measure of (the percentage of the population served by carbon emissions per kWh electricity has been compliant works) which dipped to 97.7. decreased.

Further capital investment is being made to 8 – Renewable energy ensure consistency across all sites as we work Energy from renewable sources has fallen towards the target of 100% compliance by 2020. slightly overall, with a slight increase in the percentage of energy sourced from renewable 4&5 – Preventing pollution sources in the wastewater area of the business Regrettably, South West Water failed to meet and a decrease in the drinking water area of its targets for preventing pollution in 2016. the business. Of the four Category 1 & 2 pollutions, the single Category 1 incident was related to a sewer Both of these movements relate to the year blocked with un-flushable materials. on year differences in the timing of energy usage (such as that required in drinking water We continue to promote awareness of such pumping) rather than a long term trend. issues with customers through our ‘Love your Loo’ and, more recently, ‘Think Sink!’ campaigns. South West Water remain committed to increasing its usage of renewable energy The number of Category 3 & 4 incidents through a combination of hydro power, CHP, increased, meaning that our performance for solar PV and wind. 2016 fell short of our expectations. As such we are taking a number of steps to ensure 9 – Catchment management improvements are made as we work towards Upstream Thinking is also supporting farmers our ambitious 2020 target. to access capital grant funding in order to make improvements, comply with legislation These steps include: and reduce the risk of pollution. • an improved programme of sewer network checking, surveys and cleansing To date the Company has restored in excess • the introduction of a dedicated pollution of 7,568 acres of moorland and implemented response team to attend incidents and improvement schemes at 1,056 farms in line assess potential impact with the 2015-2020 business plan. • a new system to improve data ‘visualisation’ in order to better prevent and manage incidents • increased customer awareness campaigns 11 – Supporting a natural • enhanced management, environmental environment awareness training and field team briefings In return for taking water from the within Drinking Water Services as well environment, we give back what we can by as enhanced escalation and reporting promoting biodiversity on our sites and leaving mechanisms. the environment in an improved condition. 6 – Sustainable abstractions We have performed extensive work, are accredited to ISO14001 (Environmental We are committed to managing our licensed Management) and assess that we are meeting abstraction activities in an effective and our target of supporting a healthy natural water sustainable way, taking care to minimise any environment in the Bournemouth area. impact on the local environment and working closely with the Environment Agency (EA) to ensure this remains the case. In 2016 the number of EA/WFD improvements required was zero, in line with target.

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OUR PERFORMANCE

Benefiting the community

Having a positive long-term effect on the economy, people and quality of life in the region.

1. Non-compliant bathing waters(1) £+/- 4. Contributing to our community Rep 0 0 2020 Target 158 201.5 80 2020 Target 2015 2016 0 2014/15 2015/16 2016/17 175

2. Total kms of river improved Rep

68 2020 Target (2) 62 650km total

2015/16 2016/17

3. Community scorecard KPI

2014/15 2015/16 2016/17 2020 target

RIDDOR incidence rate (nr) 7 7(3) 6 0

Number of Apprentices 61 85 102 100

Employee satisfaction (%) 74 74 69 80

Staff productivity (%) 75 77 75 80

Staff attendance levels (%) 96.4 97.1 96.4 97

Number of training days (nr) 5,707 4,634 7,667 4,000

Investors in People Silver Silver Silver Silver Standard (grade) Key Number of volunteer days 151 192 189 200 Type Visitor numbers at 1.79m 1.86m 1.96m 2.1m recreational sites £+/- Financial Sponsorship grants 74.7 89.0 74.4 80 (penalty or reward) to local community (£'000) £- Financial (1) Where failure is allocated to a South West Water asset. 2015 and 2016 performance has been assessed under revised more (penalty only) stringent EU Bathing Water Directive. (2) Total during 2015-20 period. Rep Reputational (3) Two further RIDDOR incidents which did not result in injuries occurred in 2015/16, which would now be included in reporting. KPI KPI

Result Met On target Not met but in penalty deadband Not met

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1 – Bathing water quality Apprenticeships Regulatory Reporting South West Water delivered record bathing South West Water’s apprenticeship programme water quality results against more stringent plays a key role in the company’s EU standards during 2016. Of the 143 bathing sustainability strategy as we recognise the waters tested in the South West Water Region, need to nurture talent for the future and 141 (98.6%) were classified as ‘sufficient’ or ensure vital skills are passed on to the better. More than 116 beaches (81.1%) were next generation. classified as ‘excellent’. In 2016 South West Water recruited its 100th All of Cornwall’s beaches passed and only two apprentice, a significant milestone following beaches in Devon failed with neither of these the launch of the company's award-winning due to any failure on the part of South West apprenticeship programme in 2011. Water’s own assets. Apprentices now account for over 6% of the These bathing water results are critical given workforce. The addition of the most recent the importance of the coastal environment to recruits means South West Water has achieved the region’s economy. its 2020 target three years early. We recognise that bathing water quality is Support for education dependent on a wide range of factors and work continues, alongside partners including local We continue to support the region's schools, councils, community groups, landowners and colleges and universities in a variety of ways conservationists, to tackle bathing water quality from school talks and guest lecturing to work issues in an holistic and sustainable way. experience placements and the provision of educational materials. 2 – River water quality The Company is a leading partner in the To protect river water quality and eco-systems development of a new University Technical we aim to ensure the wastewater we return to College (UTC) for South Devon, based in the environment is treated to high standards. Newton Abbot. The College, which opened in October 2015, places a unique focus on During K6 (2015-20) 21 sites have been engineering, water and the environment and identified for improvement schemes, most caters for up to 600 young people between commonly to reduce the levels of phosphorus 14 and 18. in treated wastewater. In 2016/17 this included schemes at Nanstallon and Helston. 3 – Community Scorecard Health and safety The health and safety of our employees is our primary concern and we have rigorous policies, systems and initiatives in place to ensure they return 'home safe' every day.

Our procedures and policies have been updated and we have carried out comprehensive staff training and invested in new equipment and technologies, particularly to ensure the safety of staff who may be working alone. We believe our lone worker protection now sets the standard across the industry.

Furthermore, the appointment, in 2016, of Pennon's new director of Safety, Health, Quality and Sustainability (SHQS) underlines the importance attached to health, safety and wellbeing across the wider Group.

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OUR PERFORMANCE

Benefiting the community continued

Support for our people South West Water prides itself on being a responsible employer, attaching paramount value to the safety, training, needs and ambitions of its employees.

Our annual employee survey identified a reduction in measured engagement levels from 74% to 69% across the Company. The survey identified a number of internal areas for improvement, which we have already begun to address. Action plans have been implemented in all areas of the business plan to improve engagement levels.

The company has a range of ‘family friendly’ policies, which go beyond statutory requirements.

We remain committed to a non-discriminatory employment policy, making every reasonable effort to ensure that no current or future employee is disadvantaged because of age, gender, religion, ethnic origin, marital status, sexual orientation or disability. Employee volunteering South West Water has an active volunteering programme which enables staff to take part in agreed community projects including beach cleans and habitat restoration.

The South West Water wastewater team Launch of BeachWise partnership and continued to fund Keep Britain Tidy’s BeachCare programme, which helps to sustain online advice voluntary beach clean groups across the South In 2016, South West Water spearheaded the formation of a new West peninsula. Since 2010, South West Water partnership to promote safe enjoyment of the South West’s has supported 830 beach cleans which have beautiful beaches and clean bathing waters. collected 121 tonnes of rubbish. BeachWise is also supported by Cornwall Council, the The company also participated again in the Environment Agency, Keep Britain Tidy, Marine Conservation Heritage Open Days initiative and opened its Society, RNLI, South West Coast Path Association, Surf Life doors to 200 visitors at three operational sites. Saving Great Britain and Visit Cornwall and brings together beach safety advice and useful information from all the Additionally, South West Water continued to organisations involved. support the international and industry charity, WaterAid through various volunteering events The partnership’s first joint initiative was the creation of a new and initiatives. online tool with 20 top tips to help beachgoers enjoy a safe, fun, healthy and relaxing day by the sea.

www.beachwise.uk

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Access and recreation 4 – Contributing to our Regulatory Reporting The recreational opportunities and facilities community available at South West Water’s reservoirs Bournemouth Water’s 2015-20 business plan are managed on its behalf by the South committed to achieving 175 days of educational West Lakes Trust (SWLT). Sailing, fishing, visits to schools and working days for volunteer windsurfing, wakeboarding, nature trails and charity work by 2020. cycling are just a few of the activities the Trust helps to facilitate. Employees have been actively encouraged to get involved with the community and the During 2016/17 there were more than 1.9m target was exceeded in the first year of the visits to SWLT sites. business plan.

Conservation, access and recreation activities Following the integration of the businesses, at sites in the Bournemouth Water area, South West Water’s coordinated volunteering including the management of fisheries and programme has been expanded to cover the moorings, are now also being managed by Bournemouth area. the Trust on South West Water’s behalf. This programme incorporates activity which Sponsorship and donations has historically occurred in the Bournemouth area such as presence at local fair and festivals In 2016/17 South West Water provided almost where fresh drinking water is provided to the £75,000 of community sponsorship as part of public and we talk to our customers. its business plan.

Using the Business in the Community (BiTC) framework as a guide, which marries core business purpose with identified community and social needs, South West Water’s main sponsorships were with:

• Devon and Cornwall Wildlife Trusts – in support of their community engagement and educational outreach programmes. Activities included a two-day Wildlife Celebration at Trebah Gardens in Cornwall and 55 school visits to Wembury Marine Centre in Devon • Surf Life Saving GB – in support of the Nippers & Youth Championships and a three- year Graduate Lifeguard Project programme for young people who will be able to gain a National Vocational Qualification and become a Level 1 Coach at age 16 • The South West Coast Path Association, which takes care of the 630-mile coast path, one of the region’s main tourist attractions • British elite windsurfer and Olympic hopeful Izzy Hamilton, from Bude, who learned to windsurf at Roadford Lake.

As well as providing community support through its sponsorship programme, South West Water donated £46,500 to other charities chosen by staff. These principally included: Age UK, the Devon & Cornwall Food Association, the Royal National Lifeboat Institution and the Devon and Cornwall Air Ambulance Trusts.

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OUR PERFORMANCE

Fair charging

Being efficient in order to keep our costs as low as possible and offering support to those who struggle to pay.

Key

1. Number of customers assisted 3. Fair customer bills % Type Rep Rep by water poverty initiatives (percentage of average bill) £+/- Financial (penalty or reward) 26,837 28,409 3.71 24,899 3.36 3.23 £- Financial (penalty only) 2020 Target 2020 Target Rep Reputational 23,210 3.00 - 3.75 2014/15 2015/16 2016/17 2014/15 2015/16 2016/17 KPI KPI

2. Domestic customers 4. Meters installed (cumulative) £- paying a metered bill £- Result 4,647 78.1% 79.1% 80.8% Met 2016 Target On target 81.6% 2,553 2,217 2020 Target Not met but in 2020 Target 9,300 penalty deadband 84.7% 2014/15 2015/16 2016/17 2014/15 2015/16 2016/17 Not met

Tackling Water Affordability In Partnership Tacking water poverty and reducing bad debt are key concerns for us. We are committed to doing everything we can to keep our costs as low as possible, while ensuring a high level of service while creating a fair and sustainable charging system.

We developed and implemented an affordability pilot in partnership with Westward Housing, which aimed to raise tenant awareness across specific communities of the help and support we offer, such as our Freshstart Fund and WaterCare tariff.

Training was provided to Westward Housing frontline staff, fliers were posted in the area alongside articles in the tenant newsletter and on the ground community events were held.

Analysis of the pilot showed:

• a 50% reduction in the average bill • an 11% increase in metering (compared to 3% increase on the control estate) • a 1% increase in outstanding debt (compared to 10% increase on the control estate).

Full findings of the pilot and next steps are considered in the ‘Tackling Water Affordability in Partnership’ document published on southwestwater.co.uk.

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South West Water aims to work in innovative 2&4 – Metering Regulatory Reporting ways which reduce our costs and mitigate the impact of potential volatility in the price 80.8% of our household customers are now of energy, fuel, chemicals and the other raw metered in the South West Water area. materials essential to our operations. Although this is below our target of 81.6%, the increase of 1.7% on 2015/16 is a significant By running our business efficiently we keep the improvement. The increase leaves South West costs to customers as low as possible. Through Water on course to achieve its 2020 target. our WaterShare mechanism we are able to pass the benefits of net outperformance back In the Bournemouth area, 4,647 additional to customers and shareholders in a fair and meters have now been installed in line with transparent way (see page 37). We also the Company’s metering strategy. recognise that there are people in our region who face genuine affordability challenges and This acceleration in metering uptake follows we offer a range of support schemes. a change in our policy giving household customers 24 months instead of 12 months 1 – Support for those who following a meter being installed to decide whether they wish to remain on metered need it charges going forward. South West Water is recognised for implementing innovative industry-leading Switching to a meter is a voluntary process, schemes to assist our customers with as whilst the majority of customers believe affordability or debt issues, such as our metering is the fairest way to charge people for WaterCare+ scheme, which offers advice on the water and sewage services they receive, metering, tariffs and how to ‘save water to save they do not believe that compulsory metering money’. To date 14,900 customers have been is desirable. Although switching to a meter helped by this scheme. remains an individual choice, we promote the advantages of fitting a meter whenever We were one of the first water companies to possible. introduce a social tariff to help our very low income customers in which customers benefit 3 – Fair customer bills from a bill reduction of up to 50%. Tariffs in the This performance commitment relates to Bournemouth Water area launched for 2017-18 efficient debt management for the benefit now include a social tariff for the first time. of all paying customers in the Bournemouth area. Good debt management practices, South West Water's strategy is built around together with innovative ways of engaging ensuring customers who can afford to pay with customers who have a history of bad debt do and those who cannot are given the has resulted in the cost of bad debt remaining help needed. within the performance commitment range of 3.00% and 3.75%. Innovative processes of During 2017-18 we will continue to focus on our debt management will continue to be used, schemes for those in vulnerable circumstances including utilising experiences within the and further develop our vulnerability South West Water area. awareness programme and training to ensure we offer a service that identifies and is inclusive of all our customers’ needs.

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REGULATORY REPORTING

Financial performance

Strong financial policies and prudent investment decisions are critical to ensuring a successful future for our business and the major role we play in the regional economy.

Integration of Bournemouth Water On 1st April 2016, Bournemouth Water’s operations and Ofwat licence were merged with those of South West Water. The activities of two non-regulated businesses, Aquacare and Avon Valley, were also transferred to the Company. The financial results of South West Water for 2016/17 incorporate both regions, affecting comparison with prior year figures.

The analysis below reflects the regulated (appointed) business only. Revenue Total revenue increased to £557.5m (2015/16: £544.1m including Bournemouth Water) reflecting tariff increases of 1.4% (with RPI of 1.1%) and increased total customer demand, up 2.5% in line with the drier weather over the year.

Although volumetric demand in the Revenue reconciliation Bournemouth area was higher than last year, Water the removal of the small company premium Bournemouth Water and mix of specific tariffs have resulted in less Water South West Water Wastewater revenue in this respect than anticipated. £m £m £m Final Determination Revenue allowance An additional £3.9m of revenue was generated (outturn prices) 34.9 203.2 262.2 by 7,900 new customer connections in the South West Water region and 1,150 in the Customer demand and profile (0.7) 6.0 1.6 Bournemouth Water regions. New connection numbers(1) (0.1) 0.7 1.4

81% of South West Water’s customers are Meter optants – (0.3) (0.5) now benefiting from a metered supply, with 7,691 customers opting for a meter in 2016/17 Capitalised requisitions 0.1 0.2 1.4 (2015/16: 6,058). 69% of customers in the Bournemouth Water region are metered with 34.4 209.8 266.1 2,099 switching in the year (2015/16: 2,551).

In 2016/17 total water revenue in both South West Water and Bournemouth regions was above the regulatory tolerance levels and will results in a small penalty of c.£0.2m through the Wholesale Revenue Forecast Incentive Mechanism (WRFIM).

In line with regulatory incentives the additional revenue recovered, driven by increased

customer demand, will be returned to (1) Increased new connections impacting both the water and wastewater revenue as well as increasing revenue for connection and customers in 2018/19 tariffs. infrastructure charges.

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Total expenditure (Totex) Wholesale Regulatory Reporting In line with operating costs and capital Investing in innovation Consistent with previous regulatory expenditure described on the following page, South West Water continues to invest periods South West Water has targeted South West Water’s total expenditure (totex) in innovative projects utilising new outperformance in order to maintain the for the year has remained below the levels technology. efficient cost position recognised within the allowed within the 2014 Final Determination. 2015-20 Business Plan. The Company has Building construction started during delivered strong efficiencies and cost savings Capital expenditure the year on the new Mayflower Water whilst continuing to deliver capital projects in Treatment Works which will use new line with Ofwat, Drinking Water Inspectorate Capital additions for the year were £190.9m, and Environment Agency expectations. an increase from the £134.7m during 2015/16 cutting edge treatment processes to provide high quality drinking water to (£126.3m in South West Water and £8.4m Total expenditure within both water and in Bournemouth Water). The key areas of customers in Plymouth in as efficient manner as possible. wastewater is lower than allowed within the focus remain: 2014 Final Determination largely as a result of significant capital savings and other • improved drinking water quality £60m efficiencies, including synergies arising from • ensuring a high level of bathing water quality the integration of Bournemouth Water. • delivering environmental improvements. Mayflower Treatment Works – our largest project In addition in 2015/16, South West Water Investments during the year included: advanced its pension deficit repair costs and of the 2015-20 period therefore no contributions have been made • continued investment on the new innovative this year. Mayflower water treatment works at North Plymouth The key movements in expenditure are • spend on the Tottiford Granular Activated summarised below, and include the impact Carbon (GAC) installation on totex of the timing of capital schemes • investments in sludge treatment assets largely reflecting the deferrals from 2015/16 • expansion of the water and sewer networks into this year. through requisitions • delivering additional capacity to meet growth Wholesale expenditure requirements • investment in the Market Ready programme Water Wastewater (South West Water's preparations for the £m £m opening of the non-household retail market). Final Determination Totex allowance(1) (2012/13 prices) 181.7 197.0 South West Water continues to deliver capital projects in line with Ofwat, Drinking Key drivers: Water Inspectorate and Environment Agency Capital efficiencies and cost savings (27.9) (32.3) expectations. Timing of capital schemes 11.7 13.2 Operating costs Non-recurring exceptional costs 0.2 0.2 Operating costs for the year were £326.8m Timing of pension deficit repair costs (4.4) (3.5) (2015/16: £327.8m including Bournemouth Water). Other efficiencies and cost savings (9.6) (8.9) Actual totex (2012/13 prices) 151.7 165.8 The key movements in costs reflect:

(1) Includes both South West Water and Bournemouth Water Final Determination allowances • lower doubtful debt charges • efficiencies delivered in the year including synergies from the integration of Bournemouth Water

Offset by:

• cost increases (including average inflation of 2.1%) • cost of non-household market opening • cost of meeting higher customer demand.

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REGULATORY REPORTING

Financial performance continued

Retail Retail expenditure

Total retail expenditure reduced compared Retail Retail to the prior year with the key impact Household Non-household being a targeted reduction in the cost £m £m of doubtful debts. Final Determination Totex allowance (2012/13 prices) 33.0 2.5

Driven by strong collections performance Key drivers: and working with customers to manage their Bad and doubtful debts (1.3) 0.7 debt, the bad debt charge as a percentage Non-recurring exceptional costs 0.1 – of revenue fell further this year. Net debts totalling £15.2m (2015/16: £3.7m) were written Other cost movements (1.8) 1.3 off against the provision during 2016/17, of which £3.4m related to personal and Actual costs 30.0 4.5 commercial bankruptcy and £1.3m related to our ReStart programme, a South West Water Taxation The Company will apply relevant tax laws customer affordability initiative. in a reasonable way and only engage in tax The total appointee current tax charge for the planning when it is aligned with the commercial The overall higher value in this year reflected year was £31.3m (2015/16: £17.1m including and economic activity of the business. a detailed review of customers who had Bournemouth Water). moved properties and where debt had been In respect of the overall appointed current tax outstanding for a number of years. This review The Company made a net payment of £31.3m charge of £31.3m, £3.1m has been assumed takes place every other year. of UK corporation tax in the year (2015/16: for group relief (relating to current and prior £32.4m). years). Group relief surrendered to South Whilst significant improvements were made West Water by other companies in the in the year, further initiatives are planned for The current corporation tax charge which is Pennon Group is paid in full at the applicable the coming year to maintain the doubtful debt included within the tax charge, increased from corporation tax rate for the year. allowance within the 2014 Final Determination. 2015/16. This reflects the increase in profit reported, a reduction in pension contributions In relation to the taxable profits calculated for Customer service improvements, such as an and a reduction in the adjustments to the 2016/17, South West Water has not disclaimed enhanced web offering, including free call tax charge in respect of prior periods, which capital allowances as a means of managing the backs in a two hour window and the ability for significantly reduced the 2015/16 charge. overall tax charge. customers to engage with staff in real time via Webchat, have been used to deliver cost The appointed current tax charge of £31.3m is The Company’s total tax contribution extends efficiencies (in order to offset cost pressures higher than the charge would have been based significantly beyond the UK corporation tax from inflation) and improve the customer on the standard rate of tax applied to the profit charge, including Value Added Tax (VAT), experience. for the year (a reconciliation is shown in the business rates, employment taxes, Carbon tables opposite). Reduction Commitment (CRC), Climate The retail household costs are below those Change Levy and Fuel Excise duty. allowed within the 2014 Final Determination. As a result, the current tax charge is higher than Costs have been reduced as a result improved assumed within the 2014 Final Determination performance against the doubtful debt charges with the key variances noted in the table below. and the delivery of operational efficiencies; including the realisation of Bournemouth The appointed deferred tax credit of £9.4m for Water synergies and reduced third party the year primarily reflects a reduction in the contract costs. rate of UK corporation tax.

For non-household the cost of doubtful debt exceeded the allowances within the 2014 Final Determination and costs associated with preparing the opening of the market, including additional resources during 'shadow operation' increased costs in this area.

The key movements are summarised in the following table:

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Taxation Net finance costs Regulatory Reporting

Appointee Net finance costs for the appointed business £m have increased from the prior year at £64.3m, Final Determination Current tax allowance 15.3 predominantly reflecting the higher interest on RPI index-linked debt. Aligned with the Key differences: regulatory accounting guidelines, capitalised Impact of prior years (0.5) interest of £2.8m has been excluded from the appointee regulated interest charges. Difference in profits 16.4

Depreciation and capital allowance impacts (1.6) South West Water has access to overall interest rates that are amongst the lowest in Pension adjustments 1.7 the water industry. Interest cover for 2016/17 is both within the required levels for financial Finance lease allowances 0.5 covenants and in line with expectations. Other adjustments (0.5) Dividends and retained 31.3 earnings The Company has established a dividend policy, Current taxation which involves the following components:

Appointee • a sustainable level of base dividend growth, £m determined by a number of factors including Profit before tax 168.2 the shareholder’s investment and the cost of capital Profit before tax multiplied by the standard rate of UK taxation (20%) 33.6 • a further level of growth funded by efficiency outperformance Capital allowances for the year (21.9) • comparison with the assumptions Depreciation 22.2 made by Ofwat in setting prices for the regulatory period. Pension adjustments 0.2 Dividend payments are designed to ensure Finance lease adjustments (2.5) that key financial ratios are not prejudiced, Other adjustments (includes prior year adjustments) (0.3) whilst also taking into account balance sheet considerations. Current tax charge 31.3 Payments are also designed to ensure that the ability of the appointed business to finance its business is not impaired. Dividends of £213.1m were paid to the parent undertaking, representing a base dividend of £58.4m, £54.7m of outperformance dividend based on cumulative performance for 2015/16 and £100.0m taking into consideration the balance sheet position and to optimise gearing to align with Ofwat's notional structure.

The dividend was calculated with reference to the projections in the Ofwat 2014 Final Determination and the assumptions for 2015/16 included within the 2015-20 Business Plan.

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REGULATORY REPORTING

Financial performance continued

Liquidity and debt profile Key metrics Our performance against the The Company has a strong liquidity and South West Water monitors several metrics K6 Regulatory Contract funding position with £243.3m cash and (including those within the Regulatory (2015-2020) deposits at 31 March 2017 (including £221.7m Reporting table 4H) as outlined below: South West Water, which since 1 April 2016 of restricted funds representing deposits with includes Bournemouth Water, performed well lessors against lease obligations). In addition Regulatory Capital Value (RCV) during the year. South West Water’s Return the Company has £510m of undrawn facilities. RCV is the financial base used by Ofwat to on Regulated Equity (RORE) performance Cash and current asset investments reflects allow a rate of return and set prices at each continues to be sector leading and is £243.3m within the appointed and £4.1m in Periodic Review. At 31 March 2017 RCV outperforming our business plan with 11.9% the non-appointed business. equalled £3,290.7m (including Bournemouth delivered in the year (12.6% based on our Water) and RPI at the year end of 1.6%. WaterShare RORE approach). The Company’s financing structure gives the The RCV at 31 March 2016 was £2,997.3m scope and flexibility needed to implement our for South West Water and £152.9m for RORE is calculated using actual results strategic objectives and maximise value. Bournemouth Water. before non-underlying items (deflated into 2012/13 real prices) and compared against Funding facilities are in place to cover both Regulated gearing the Final Determination allowances, based on medium and long-term requirements, including The regulated gearing of 61.9% has been notional gearing (at 62.5%), annual average loans from the European Investment Bank calculated as net debt as a proportion of RCV RCV and taking into account tax impacts of (EIB) and finance leasing arrangements. with Ofwat’s notional regulated gearing for K6 outperformance. It arises from base returns In addition, short-term facilities exist with (2015 – 2020) set at 62.5%. of 6.0% plus: a range of financial institutions. Post tax return on regulated equity • Total expenditure (Totex) savings and At 31 March 2017 the Company’s loans and The post tax return on regulated equity of efficiencies, taking into account the phasing finance lease obligations totalled £2,281.1m. 11.2% has been calculated as profit after of actual expenditure compared to the After the £243.3m held in cash deposits this current tax for the appointed business as a planned programme within our Business Plan results net debt of £2,037.8m (an increase of percentage of average regulated equity. and reduction in the RCV run-off for the RCV £244.5m during the year). element of totex outperformance based on Dividend yield the Final Determination Pay-As-You-Go The Company’s debt has a maturity of up to The dividend yield of 17.0% is calculated as the • Outcome Delivery Incentives (ODIs) 40 years with a weighted average maturity total appointed dividend for the year of £213.1m reflecting operational performance and net of 24.5 years. The Company has fixed, or put on the regulated equity of £1,252.7m. Excluding ODI rewards in place swaps to fix the interest rate on at the impact of the £100m dividend to increase • Financing outperformance reflecting the least 50% of its debt for the regulatory period gearing towards Ofwat's notional level, the difference between actual real average (K6 2015-20). dividend yield would be 9.0%. interest rate and allowed financing rates.

The Company also has £492.6m of debt Dividend cover index-linked to 2041-2057 at an overall real The dividend is covered 0.7 times and has WaterShare RORE rate of 1.89%. As a result of these initiatives been calculated as the profits of the appointed In 2015, and prior to Ofwat’s guidance on South West Water’s nominal average effective business for the year before dividends divided RORE, South West Water established an interest rate for 2016/17 is 2.43% (Table 1E). by total appointed dividend for the year (1.3 approach to RORE outperformance consistent times when excluding the £100m dividend with the approach adopted for our innovative to increase gearing towards Ofwat's notional WaterShare mechanism. It calculates interest level). outperformance based on the outturn effective interest rate however this is translated into Interest cover a real rate using the cumulative forecast RPI South West Water has access to overall over the K6 period – currently forecast at 2.8%. interest rates that are amongst the lowest All other elements of RORE are calculated in the water industry. Interest cover of 4.1 consistently with Ofwat’s approach. for 2016/17 is both within the required levels for financial covenants and in line with For 2016/17, South West Water achieved a expectations. RORE of 12.6% in line with this approach (2015/16: 11.7%).

During the year Ofwat issued additional guidance to companies which requires financing outperformance to be calculated using the in-year average RPI rate of 2.1% (2015/16: 1.1%) to calculate the real effective interest rate. This results in a total RORE of

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11.9% for 2016/17 (2015/16: 10.1%). In addition, with stable serviceability across all water Regulatory Reporting Watershare RORE the RORE reported in table 4H of 11.0% is a and wastewater areas has been maintained. cumulative average over the first two years Rewards were delivered across bathing water 12.6% of K6 (2015-2020). South West Water’s RORE quality, water restrictions with interruptions 3.1% 11.7% remains sector leading under this approach. to supply and leakage showing a significant 3.0% improvement from the 2015/16 position. 0.8% Totex outperformance 0.2% 3.2% 2.5% South West Water is striving for ever greater The cumulative net reward of £5.5m comprises efficiency and is confident in maintaining £7.5m of net rewards recognised at the end of 6.0% 6.0% the momentum achieved in K6 to date. The the regulatory period and £2.0m of net penalty Financing company was deemed to be at the frontier which could be adjusted during the regulatory ODIs of cost efficiency when it was awarded an period. Totex enhanced Business Plan assessment with Base returns(1) 2015/16 2016/17 the largest element of potential operational Whilst penalties have arisen on pollution outperformance over K6 coming from totex events and external flooding, ODIs in (1) Interest outperformance is based on the outturn effective interest rate on net debt, translated into an effective real savings and efficiencies. South West Water wastewater continues to be an area of focus interest rate using the Fisher equation and cumulative K6 is ‘front-end-loading’ efficiencies and savings and performance has improved from last year. forecast RPI of 2.8%; notional debt gearing of 62.5%, and the headline tax rate. to allow early and more certain delivery of outperformance. As a result £129m of WaterShare Mechanism RORE – 2016/17 cumulative Totex savings to 2016/17 (£73m delivered in the year) compared to the Final South West Water has in place a unique Determination allowances have been delivered WaterShare mechanism to share net benefits to date. These savings are driven by: with customers through reinvestment options, future bill reductions and service • continuing advantages from our strategic improvements exceeding planned targets. alliances including a new water distribution 11.9% framework and the H5O capital alliance in WaterShare reflects the established place since 2010, now also delivering efficient mechanism for sharing totex outperformance schemes within the Bournemouth region but also allows customers to share in financing • ensuring efficient capital investment through outperformance from movements in the (3) the use of data analytics optimising capital market rates for new debt instruments. In and operating solutions and promoting addition specific items are also shared with efficient off-site build techniques customers – with differing rates depending on Base 6.0% • changing ways of working through our the Company delivery. Totex 3.2% iOps programme including utilising new ODIs 0.3% technology and equipment to increase the The WaterShare scheme identified £4.5m of (2) Financing 2.4% resources needed to deliver wastewater benefits to customers during the year under review. RORE – 2015-20 cumulative improvement, real-time pressure and management targeting of efficient interventions This is in addition to the £3.1m shared in • delivering Bournemouth Water synergies 2015/16. Following discussions with the with c.£27m of synergies targeted over independent WaterShare panel, it was decided K6 on track and further support function to invest the £3.1m in key areas of customer efficiencies. service. How the benefit in 2016/17 is to be applied will again be considered by the 11.0% Outcome delivery incentives (ODIs) reward WaterShare panel. South West Water has 23 ODIs and Bournemouth Water 10 ODIs, which have In addition, the ODI performance for South potential financial rewards or penalties. West Water has been reported and discussed Incentives for performance are recognised in at the WaterShare panels throughout the year. the year of delivery (for the purposes of this Base 6.0% calculation, though not accrued in the financial Totex 2.9% statements), whether the measure is recovered ODIs 0.3% in period or as a regulatory true-up at the Financing(2) 1.9% end of the period. Operational performance for the year has continued to improve and (2) Interest outperformance is based on the outturn effective performance for the year results in the (3) Financing outperformance is based on comparing interest rate on net debt, translated into an effective real average iBoxx rates, adjusted by RPI of 2.8% and interest rate using the fisher equation and average RPI of delivery of a net ODI reward of £3.6m (£5.5m compared to the cost of debt new debt allowance of 2.1%. 2.1% for 2016/17 and 1.1% for 2015/16; notional debt gearing cumulatively) reflecting RORE outperformance This is applied to an assumed new debt proportion of of 62.5%, and the headline tax rate for the company. Tax of 0.3% for the year. Good asset reliability 25% and adjusted for the tax impacts. 100% of the benefit impacts reflect actual effective tax rates. is allocated to customers.

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southwestwater.co.uk/report2017 REGULATORY REPORTING Governance 40 Assurance 50 Risk and compliance statement 53 Accounting disclosures 57 Auditors’ report 60 Technical Auditors’ Report 65 Regulatory reporting 67 Price review and other segmental reporting 72 Performance summary 84 Additional regulatory information 90 Cost allocation and transfer pricing 101

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REGULATORY REPORTING

Governance

Introduction During the year, Gill Rider, monitored the operation of the governance structure and carried out a formal review. In addition, an external, South West Water remains committed to operating its business independent evaluation of the Board's structure, operation and adhering to the highest standards of corporate governance. We see performance was commissioned. Based on these assessments, the strong governance as central to the successful management of any Board has concluded that the governance framework, which comprises company, and the framework for the effective delivery of our own the operation of the Board, its Committees and executive management, strategy and sustainability objectives. as well as the risk management and internal control environment is robust and effective, and is operating smoothly. The Company's governance structure was reviewed at the beginning of the year as part of a group wide initiative, which resulted in changes We describe the governance structures and the respective roles of the being implemented across the Pennon Group that have reinforced the Board, its committees and executive management on pages 48 and 49. good governance already in place. The revised governance structure has helped ensure we operate effectively and cohesively across the South West Water’s group context Group with efficient and transparent decision-making while preserving the degree of regulatory independence that Ofwat requires for the ring- South West Water Limited is a subsidiary of Pennon Group plc (which fenced business of South West Water. is South West Water's immediate and ultimate parent company), a FTSE 250 company, whose principal significant trading subsidiaries are South West Water is wholly owned by a single company, Pennon shown below: Group Plc and the Chairman of South West Water (Sir John Parker) is also the Chairman of Pennon Group. Pennon Group has appointed a Note: this is a summary structure and includes only South West Water’s Senior Independent Director (Gill Rider) to be available to shareholders trading subsidiaries. South West Water’s subsidiaries are listed in full in and other stakeholders where contact through other channels is South West Water’s Annual Report and Financial Statements (note 16, either inappropriate or has failed to resolve concerns. She is also a page 127). Non-executive Director of South West Water and is also available to stakeholders to address any specific issues concerning South West Water.

In addition to the Pennon Group plc role of Senior Independent Director, South West Water has Executive and Non-Executive Directors who are not Directors of Pennon Group. These Directors provide a strong Regulatory ringfence independent voice on the Board and they are available to address South West Water’s stakeholders’ concerns if required.

Whilst the approach to governance had previously been discussed with Ofwat and the Company Financial Monitoring Framework published in November 2016 confirmed this position, it was noted that the description of South West Water's governance approach was not sufficient to clearly demonstrate our application of Ofwat’s board leadership, transparency and governance principles for other stakeholders.

We have acted on the feedback received and as a result we have Source Contact Peninsula South West Water enhanced our governance disclosures throughout our reporting. These Management Properties (Exeter) Finance Plc disclosures have been discussed with Ofwat and our WaterShare Panel and Customer View Group.

Further information on the approach to Group and South West Water governance is included in pages 31 to 63 of South West Water’s Annual Report and Financial Statements.

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South West Water Viridor Regulatory Reporting Viridor provides waste management services to UK residential and South West Water provides regulated water and wastewater services commercial customers including recycling, composting and energy across Cornwall, Devon and parts of Dorset and Somerset, in addition recovery facilities. to a small number of non-appointed services. On 1 April 2016, South West Water acquired 100% of the share capital of Bournemouth Water Limited from Pennon Group plc. From that date the trade and assets Pennon Water Services of Bournemouth Water were merged into South West Water Limited. Pennon Water Services was established as a Pennon subsidiary in 2015 Bournemouth Water’s licence as a water only undertaker under the and from 1 April 2017 has provided retail services to non-household Water Act 1991 was terminated and South West Water’s licence was customers following the sale of South West Water's non-household modified to cover the Bournemouth Water area. South West Water customers and related assets. Limited is therefore now responsible for delivering the business plans in both the original South West Water area of operation and During 2016/17 it provided management services to South West Water the Bournemouth Water area of operation (covering areas of Dorset, in respect of South West Water’s non-household retail customers as we Hampshire and Wiltshire). prepared for market opening and retail exit.

With the operations of Bournemouth Water merged into South West Whilst part of the wider Pennon Group, South West Water and Pennon Water, they are now part of the governance systems and processes Water Services have in place robust policies and practises to ensure full described in this section of the report, which apply across the competition compliance with the market codes for the non-household whole company. retail market. The Bournemouth Water brand has been maintained within the Board Independence Bournemouth Water area and South West Water ensures that Bournemouth Water customers and other stakeholders interests are Notwithstanding Sir John’s chairmanship of Pennon, the South West appropriately reflected and represented. The managing director of Water Board believes that he continues to demonstrate independence Bournemouth Water was appointed as Operations Director (Drinking of character and judgement (of Pennon and its investors, and of Water Services), a member of the Executive Management (see page management) when leading the Board in debate on South West 48), following the merger of drinking water operations. A separate Water matters. customer challenge group (Customer View) continues to operate in the Bournemouth Water area. Sir John Parker was considered to be independent at the time of his appointment, in accordance with Provision A.3.1 of the UK Corporate Governance Code (“the Code”). At that time, the Board concluded South West Water’s subsidiaries that none of the criteria set out in Provision B.1.1 of the Code applied Source Contact Management Limited manages South West Water’s to Sir John; although he was appointed to the position of Chairman of billing, collections and customer contact activities. Pennon Group plc on the same date, he was not placed on the South West Water Board by Pennon in order to represent Pennon’s interests Peninsula Properties (Exeter) Limited advises South West Water but rather to help the flow of information and foster an understanding on property development opportunities. It also provides property of the issues facing the South West Water at Pennon board level. The development and consultancy services to other companies within the South West Water Board believes that this model worked to South West Pennon Group as well as others. Water’s benefit in the past.

South West Water Finance Plc acts as a financing company for raising Martin Angle, Neil Cooper and Gill Rider are considered to be borrowings for South West Water. independent in character and judgement also they were appointed to the South West Water Board in order to facilitate the Group’s revised governance framework, rather than to represent the interests of the shareholder.

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REGULATORY REPORTING

Governance continued

South West Water Limited Board of Directors In addition Susan Davy, Pennon Group Chief Financial Officer also attends the South West Water Board. The Board considers the Non-executive The South West Water Board of Directors at the end of the 2016/17 Directors to be independent in accordance with the UK Corporate financial year comprised the Chairman (a Non-executive Director), three Governance Code. The Board believes its Directors have an appropriate Executive Directors, and five further Non-executive Directors, with a range of skills and experience to oversee the business of the Company. vacancy for a sixth Non-executive Director (recruitment is underway).

Sir John Parker Chairman Dr Stephen Bird Managing Louise Rowe Finance Director Chris Loughlin Pennon Group Susan Davy Pennon Group Chief Director Chief Executive Officer Financial Officer(1)

Appointment Sir John was Appointment Stephen was Appointment Louise was Appointment Chris was Skills and experience Susan is appointed to the South West appointed to the Board on 1 appointed South West Water appointed to the Board on a member of the Pennon Board Water Board on 31 July 2015 March 2000 and was appointed Finance Director on 1 February 1 August 2006 as Chief and Pennon Executive. having been appointed to the to the position of Managing 2015. Executive of South West Water. Pennon Group Plc Board as Director of South West Water He became the Pennon Group Susan is a graduate qualified Deputy Chairman on 1 April 2015. on 1 January 2016. Skills and experience Louise Chief Executive Officer on chartered accountant with 20 has been with South West Water 1 January 2016. years’ experience in the utility He became Chairman of both Skills and experience Prior for over eight years, holding a sector. boards on 1 August 2015. He is to joining South West Water, range of managerial roles in the Chris is a member of the also chairman of the Nomination Stephen held posts in the Welsh Finance Directorate prior to her Sustainability Committee. Prior to her current appointment Committee. Water Authority, National Rivers appointment as Finance Director. Susan was Finance Director Authority and Wallace Evans Skills and experience Chris at South West Water between Skills and experience Sir John Consultants as an environmental She is physics graduate has extensive experience of the 2007 and 2015, during which is a highly experienced and consultant. and qualified as a chartered regulated business environment time she was responsible for independent chairman and brings accountant with KPMG. and the management of major the company’s Business Plan to a wealth of leadership experience He is a Fellow of the Chartered engineering and infrastructure 2020. She has also held a number across a range of industries. He Institute of Environmental She was recently appointed services. He started his career of other senior finance roles in won the lifetime achievement Managers, fellow of the Institute Non-executive Director for the as a chartered engineer working the water sector, including as award at The Sunday Times of Directors and holds an MBA. Cornwall and Isles of Scilly Local in both the consulting and Head of Regulation and Head 2015 Non-Executive Director Enterprise Partnership. contracting sectors and, after of Finance (Wastewater) at Awards and is widely recognised holding a number of senior Yorkshire Water. for his policy work on corporate positions with British Nuclear governance, including the value Fuels plc, joined its board as an Susan’s knowledge of the of diversity in the boardroom. executive director. Prior to joining industry coupled with her Pennon he was chief operating financial and regulatory expertise He has chaired five FTSE100 officer with Lloyds Register and has supported the development companies and was previously before that executive chairman of of the group’s strategy and her the chairman of National Grid plc, Magnox Electric plc. He was also input has been invaluable to the senior non-executive director and a senior diplomat in the British Board in its deliberations. chair of the Court of the Bank of Embassy, Tokyo. England, deputy chairman of DP (1) In attendance at the South West World, joint chair of Mondi and Chris has a comprehensive Water Board. chair of BVT and P&O plc. He understanding of the water was also president of the Royal industry. He was previously a Academy of Engineering from board member (and, for a period, 2011 to 2014. president) of the Institute of Water, and between April 2008 and March 2012 was chairman of Water UK.

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Martin Angle Non-executive Neil Cooper Non-executive Martin Hagen Non-executive Gill Rider Non-executive Lord Matthew Taylor Non- Director Director Director Director executive Director

Appointment Martin was Appointment Neil was appointed Appointment Martin was Appointment Gill was appointed Appointment Matthew was appointed to the Board on 1 April to the Board on 1 April 2016, appointed to the Board on to the Board on 1 April 2016, appointed to the South West 2016, having been appointed to having joined the Pennon Group 1 September 2010. having been appointed to the Water Board on 1 March 2010. the Pennon Group Plc board on Plc Board on 1 September 2014. Pennon Group Plc board on 1 1 December 2008. He is chairman He is chairman of the Audit Skills and experience Martin September 2012. She is chairman Skills and experience Matthew of the Remuneration Committee Committee and a member of the was previously Deputy Chairman of the Sustainability Committee was MP for Truro and St Austell and a member of the Audit, Remuneration and Nomination of the Financial Conduct and a member of the Audit, for 23 years from 1987, until he Nomination and Sustainability Committees. Authority’s Regulatory Decisions Remuneration and Nomination stood down at the 2010 general Committees. Committee, a board member Committees. election. He has expertise Skills and experience Neil and President of the Institute in planning for sustainable Skills and experience Martin is brings to the Board extensive of Chartered Accountants in Skills and experience Gill communities. an experienced non-executive experience in a wide variety of England and Wales and senior has a wealth of experience in director, bringing a wide range of corporate and financial matters. partner of Deloitte’s West of leadership, governance and knowledge and experience from Most recently, is Chief Financial England practice. remuneration across a broad a career in investment banking, Officer of Currencies Direct range of sectors including private equity and industry. Limited and have previous professional services, education roles of group finance director and government. Over a 20-year executive of Barratt Developments plc career in investment banking, and, before that, group finance Formerly, she was head of the Martin held senior roles with director of William Hill plc and Civil Service Capability Group SG Warburg & Co. Ltd, Morgan Bovis Homes plc. in the Cabinet Office, reporting Stanley and Dresdner Kleinwort to the Cabinet Secretary and Benson, before becoming the He also held senior prior to that held a number of group finance director of TI finance positions at senior positions with Accenture Group plc, then a FTSE 100 Whitbread plc, worked for LLP culminating in the post of company. He subsequently joined PricewaterhouseCoopers as a chief leadership officer for the Terra Firma Capital Partners management consultant and global firm. She was previously where he held various senior held a number of roles with president of the Chartered roles in its portfolio companies, Reckitt & Colman plc. Institute of Personnel and including the executive Development and a non- chairmanship of the Waste executive director of De La Recycling Group Limited, then a Rue plc. major participant in the UK waste sector, and Le Meridien Hotel Group where he was executive deputy chairman.

Martin has also served as a non- executive director on a number of boards including Savills plc, where he was the senior independent director; National Exhibition Group, where he was chairman; Severstal; and Dubai International Capital. Details of the external appointments of each of the Directors is included in South West Water’s Annual Report and Financial Statements (pages 33 to 36).

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REGULATORY REPORTING

Governance continued

The Board and its governance framework Board structure summary The following diagram summarises the context and structure which the South West Water Board operates within aligned with the revised governance approach of Pennon Group plc:

Pennon Group plc Board Decision making responsibilities for Pennon Group and Viridor Limited matters. In addition ratifies certain decisions made by the South West Water Board Pennon Executive Management Define and drive the business priorities that will advance the South West Water Board delivery of the Pennon Group’s An independent and separate Board from strategy the Pennon Group plc Board, responsible for decisions relating to the business of South West Water Limited

South West Water South West Water Audit Committee Executive Management Responsible for the day to day management of South West Water Company business Sustainability Committee

Sub-committees and Steering South West Water Groups Nomination Committee Established for significant ongoing matters and projects which are significant to the South West Water strategy and operations of Remuneration Committee the Company

Outcome Delivery Investment Contract Strategy Periodic Review Health and Safety Risk and Assurance Incentive (ODI) Planning Group (CSG) 2019 (PR19) Steering Group Forums Group Committee (IPC) Oversees strategies Steering Group Established to Reviews the Oversees the Effective owner and policies to Oversees South oversee South West principal and Company’s plans of procedures promote effective West Water’s Water’s approach business risk to deliver the controlling and working practices business planning to health and safety assessments as performance approving capital for strategic for the 2020-25 (including broader well as the controls commitments it has investment. Ensures contracting regulatory period staff welfare) and mitigations in made to customers principles of proper relationships place and assurance and stakeholders financial control activities

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Pennon Group plc Board Chaired by the Pennon Chief Executive Officer, the Pennon Regulatory Reporting Executive meets formally on a monthly basis to review and refine The Pennon Group Board’s responsibilities include overall leadership recommendations to be presented to both the Pennon and where of Pennon Group, setting the Group’s values, policies and standards, applicable the South West Water Boards. Members of the Pennon approving Pennon’s strategy and objectives and providing oversight of Executive are: the Group’s operations and its performance. The Pennon Group Board has also reserved to itself the requirement to ratify certain decisions • Chris Loughlin, Pennon Chief Executive Officer taken by the South West Water Board, including: • Susan Davy, Pennon Chief Financial Officer • Helen Barrett-Hague, Pennon Group General Counsel & • major capital projects and investments Company Secretary • long-term objectives and commercial strategy • Adele Barker, Pennon Group Director of Human Resources • the five-year regulatory business plan • Stephen Bird, Managing Director, South West Water • annual budgets • Sarah Heald, Pennon Director of Corporate Affairs & Investor Relations • certain decisions relating to financing. • Steve Holmes, Pennon Director of Safety, Health, Quality & Sustainability (SHQS) This approach ensures that South West Water continues to operate as a • Ed Mitchell, Pennon Director of Environment and Interim Operations separate Board with control of the business and strategy, but recognises Director (Wastewater Services) South West Water the support and oversight required within a group structure and is • Phil Piddington, Managing Director, Viridor compatible with Ofwat’s principles for holding companies in respect of • Paul Ringham, Commercial Director, Viridor Board leadership, transparency and governance. • Bob Taylor, Operations Director (Drinking Water Services) South West Water South West Water Board As a regulated water and sewerage company which is part of the listed South West Water Executive Management Pennon Group, it is important that South West Water acts as a separate Day to day management of South West Water’s operations and company and that the interests of customers and other stakeholders activities is undertaken by South West Water’s Executive Management. are protected. South West Water’s ‘Board, Leadership, Transparency and It includes Dr Stephen Bird (Managing Director) and Louise Rowe Governance Code’ commits it to acting as if it is a separate public listed (Finance Director), who are also members of South West Water’s Board company as far as is possible. and whose experience is described on page 42. There are five further members of the Executive Management, who have responsibilities for The South West Water Board continues to operate as a separate key areas of operations of South West Water: independent board in accordance with its own schedule of matters reserved to ensure compliance with Ofwat’s principles on board • Jo Ecroyd – Customer Services Director leadership, transparency and governance. As described in more • Graham Murphy – Engineering Director detail on pages 41 to 42 of the South West Water Annual Report and • Bob Taylor – Operations Director (Drinking Water Services) Financial Statements, South West Water itself complies with the UK • Iain Vosper – Regulatory Director Corporate Governance Code as far as is possible within the context of the group structure. Towards the end of the year, Andrew Willicott, the Operations Director (Waste Water Services) resigned and the recruitment process for his The Pennon Board and South West Water Board usually meet permanent successor is ongoing, with Ed Mitchell acting as Interim sequentially on the same day to allow a more holistic and cohesive Operations Director (Wastewater Services). approach to decision-making, in particular in areas where discussion is required at both the South West Water Board and Pennon Group In addition following changes in the Pennon Group structure, Monica Plc Board. This is in part facilitated by the dual directorships held by Read, Business Services and Sustainability Director, withdrew a number of directors and through the attendance of the Pennon from South West Water’s Executive Management to focus on the Group Chief Financial Officer. This approach is mirrored by the Board implementation of Pennon Water Services Limited. Committees. Further information on the operations of the Board and committees are included on pages 32 to 63 of the South West Water Further information on the structure and operations of the South West Annual Report and Financial Statements. Water Executive Management and the sub-committees which support the decision making of the business is included on pages 48 and 49. Pennon Executive Management The role of the Pennon Executive is to define and drive the Pennon Group’s priorities that will achieve delivery of the Group strategy. It is responsible for ensuring, to the extent of the authority delegated by the Boards, the proper and prudent management of Group resources to create and maximise shareholder value.

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REGULATORY REPORTING

Governance continued

Operation of the South West Water Board The South West Water Code states that the Company will comply with the UK Corporate Governance Code to the extent that it can be The Pennon Board and the South West Water Board meet sequentially, applied to South West Water within the context of the Pennon Group decisions relating to South West Water are discussed either through structure. The Company will continue to regularly review its governance individual written reports or where appropriate through separate structures, ensuring it continues to carry out its business in a sections within Group reports or presentations. These are circulated transparent way, designed to secure the Company’s long-term success usually in advance of the meetings from the Executive Directors and the and profitability. Company Secretary on matters within their respective business areas. Where appropriate, the Board also receives presentations on key areas In light of these requirements the Chairman and Pennon Chief Executive of the business and undertakes site visits to gain a better understanding have again discussed the group's reviewed governance structure. of the operation of business initiatives.

Under the guidance of the Chairman all matters before the Board are discussed openly and presentations and advice are received frequently from other senior executives within the Company and from external advisors to facilitate the decision making of the Board. The discussions and decisions relating to South West Water are clearly noted within separate Board minutes.

The Chairman and Non-executive Directors take particular care to ensure that the Board considers the interests of customers in all matters discussed by the Board, reflecting a very real understanding of the particular pressures on South West Water customers. In addition to a monthly review of customer contact and complaint analysis, the Board is regularly updated on customer satisfaction surveys.

South West Water has monitored customer satisfaction with service and value for money quarterly for over 20 years, and has also facilitated focus groups to discuss local and regional investment. Findings from all methods of customer consultation are fed back to the Board and incorporated into Company plans. Company and Group Compliance with the highest standards of Board leadership and governance South West Water Limited is a wholly-owned subsidiary of Pennon Group plc, a FTSE 250 company with a premium listing on the Official List, trading on the main market for listed securities of the London Stock Exchange.

South West Water and its parent company Pennon Group plc, remain committed to operating to the highest standards of board leadership and governance including transparency of reporting to investors, customers, regulators and other stakeholders. The full range of South West Water’s corporate issues including strategy, performance, delivery, compliance and governance are covered within the governance structure shown above.

In response to, and in accordance with Ofwat’s ‘Board leadership, transparency and governance – principles’ (January 2014) and the timetable for meeting those principles, South West Water adopted its own Board leadership, transparency and governance Code (31 March 2014) which sets out how South West Water complies with the Ofwat principles.

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Committees of the Board The roles and membership of each committee are summarised Regulatory Reporting below. A comprehensive summary of each committee’s role, its Aligned with the approach to the South West Water Board, the Audit, membership and attendance as well as key activities undertaken Sustainability, Nomination and Remuneration Committees meet during the year is included in South West Water’s Annual Report sequentially on the same day. This is facilitated by the dual directorships and Financial Statements. held by a number of directors and through the attendance of the Pennon Chief Financial Officer at the Audit Committee.

The Audit Committee The Sustainability Committee see more detail page 46-52 of the Annual Report and see more detail page 53-54 of the Annual Report and Financial Statements Financial Statements The Audit Committee provides a key element of the Company’s The Sustainability Committee is responsible for reviewing the governance structure. strategies, policies, management and initiatives in the context of how the company conducts its business in a responsible and It ensures that the interests of shareholders, customers and sustainable manner. other stakeholders are protected and that responsible business practices are adhered to. The Committee’s remit is to achieve Sustainability is an integral part of South West Water’s strategy and compliance with best practice in terms of corporate governance, South West Water continues to take its responsibilities very seriously internal control, risk management and financial reporting, and act as a in all its business and operational practices. Our investment and link between external auditors and Board of Directors. commitment to high levels of service and performance helps us to meet our communities’ long-term needs. Members of the Audit Committee: • Neil Cooper (Chairman) Members of the Sustainability Committee: • Martin Angle • Gill Rider (Chairman) • Martin Hagen • Martin Angle • Gill Rider • Lord Matthew Taylor • Lord Matthew Taylor • Steve Johnson(1)

The Nomination Committee The Remuneration Committee see more detail page 57-58 of the Annual Report and see more detail page 59-60 of the Annual Report and Financial Statements Financial Statements The Nomination Committee is responsible for considering and The Remuneration Committee’s principal function is to consider the recommending to the Board persons who are appropriate for remuneration of the Company’s Directors. appointment as Executive and Non-executive Directors and for other senior management roles, so as to maintain an appropriate balance Remuneration of employees other than Executive Directors is of skills and experience within the Company and on the Board. considered by Executive Directors and Senior Management. Trade Unions recognised by the Company are consulted as part of annual This Committee meets to select and recommend appointments pay review processes. All employees of South West Water are to the Board. members of a bonus scheme which takes into account Company performance (both financial and non-financial) as well as personal Members of the Nomination Committee: performance. • Sir John Parker (Chairman) • Martin Angle The Remuneration Committee is also responsible for setting the • Neil Cooper remuneration policy and reviewing the link between Directors • Martin Hagen performance and remuneration. The comprehensive remuneration • Gill Rider report is included in the South West Water Annual Report and • Lord Matthew Taylor Financial Statements on pages 64 to 93.

Members of the Remuneration Committee: • Martin Angle (Chairman) • Neil Cooper • Martin Hagen • Gill Rider • Steve Johnson(1)

(1) Steve Johnson resigned on 28 April 2016 and recruitment for his replacement is underway.

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Governance continued

South West Water’s Executive Management responsibility. Collectively South West Water’s Executive Management is responsible for delivering operational and financial performance in line The Managing Director, Dr Stephen Bird, is responsible for all of South with the Board’s strategic direction. West Water’s executive matters. The team includes Dr Stephen Bird (Managing Director) and Louise Day to day management of South West Water’s operations and activities Rowe (Finance Director), who are also members of South West Water’s is undertaken by South West Water’s Executive Management, which Board and whose experience is described on page 42. The five other comprises seven members and operates under the direction and members of the Executive Management, who have responsibility for key authority of the Managing Director. The team comprises a mixture of areas of operations of South West Water, and their experience both Executive Directors and five other operational leaders, each of is as follows: whom brings extensive skills and expertise relevant to their area of

Bob Taylor Operations Director Graham Murphy Engineering Iain Vosper Regulation Director Jo Ecroyd Customer Service Ed Mitchell Interim Operations (Drinking Water Services) and Supply Chain Director Director Director (Wastewater Services)

Bob joined South West Water’s Graham joined South West Water Iain is a Chartered Accountant Jo joined South West Water Ed Mitchell joined Pennon Group Executive Management on in 1991 and has held a number who joined South West Water in in 2006 as Service Centre Plc as Director of Environment 1 January 2016. of managerial roles across the 2008 following both audit and Manager and has held a variety in April 2017. Following the business. senior financial roles. of customer service and service resignation of Andrew Willicott He was Managing Director of improvement focused roles. in March 2017 he has been Bournemouth Water from April He is now responsible for the He has held a range of financial appointed South West Water’s 2015 until the merger of its delivery of the Company’s and operational managerial roles In October 2016 she was Interim Operations Director operations into South West Water capital investment programme within South West Water. promoted to Customer Service Wastewater Services, while the in April 2016, having previously (including the new Mayflower Director, joining the Executive recruitment process is ongoing served as Bournemouth Water’s Treatment Works) and the He was Programme Manager Management. for a permanent appointment. Operations Director as well as development of the capital for the 2014 price review, when a number of senior roles within maintenance and supply South West Water’s business She has overall responsibility Ed was previously involved in Sembcorp. and demand elements of the plan for 2015-20 was recognised for retail services provided to South West Water's Customer business plan. as one of only two in the UK South West Water’s household Challenge Group and Pennon’s He has previously held a wide water industry with ‘enhanced customers, as well as for all Conservation and Recreation number of Managing Director Prior to working at South West status’ by the industry regulator, operational customer service Forum. He brings with him a and other senior positions within Water, Graham held a number Ofwat. interactions with household wealth of experience, having both UK and overseas water of posts within British Gas. customers. spent eight years at the and utility companies. Iain is responsible for Environment Agency. Prior to He is a Chartered member of compliance with regulatory this Ed held senior positions Bob has masters degrees in both the Institution of Personnel and and environmental obligations at Thames Water and the Public Health Engineering and in Development as well as the and for the asset management Department of Environment, Business Administration. Institution of Gas Engineers and strategy and our new Wholesale Food and Rural Affairs. Management and has a Masters Service Desk, which interacts He is a fellow of the Institution of in Business Administration. with water retail companies He sits as a Non-Executive Civil Engineers, CIWEM and the in the newly established non- Director of Water and Sanitation Institute of Directors. household market. for the Urban Poor, a not-for- profit company he helped set up, which provides water, sanitation and hygiene services to people living in slums in the developing world.

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The Executive Management have established a number of sub-groups Health and Safety Steering Group (HSSG) Regulatory Reporting and committees to oversee core strategic priorities and specific areas of governance requiring regular focus and attention. The key groups and The Health and Safety Steering Group, chaired by South West Water’s sub-committees are detailed below: Managing Director, meets on a quarterly basis. The group oversees South West Water’s approach to Health, Safety Outcome Delivery Incentive (ODI) Group and staff welfare and receives quarterly presentations from each Following extensive customer and other stakeholder consultation operational area of the business (such as Drinking Water, Wastewater during the 2014 periodic review, performance commitments were and Retail) regarding performance in the preceding quarter. identified against key customer priority areas. Each of these performance commitments is incentivised under the current The group also reviews the effectiveness of ongoing initiatives (such regulatory framework with either financial or reputational incentives as ‘Quest,’ ‘Think, Act, Prevent,’ and ‘Hang On A Sec’) and performs (Outcome Delivery Incentives). more detailed hazard reviews. The group also monitors health and safety procedures in place within, This group has been established to oversee South West Water’s as well as performance of our key strategic partners. plans to deliver the commitments it has made to customers and stakeholders over the 2015-20 period. It feeds into a Pennon Group level equivalent. Health and Safety is also the first item on each Board agenda. It meets monthly, includes members of the Executive Management and relevant Senior Managers responsible for the delivery of South Risk and Assurance Forums West Water’s performance commitments. South West Water’s Risk and Assurance forums meet on a quarterly Investment Planning Committee (IPC) basis to review both principal and business risks with management justifying their risk assessments through formal reports and South West Water’s Investment Planning Committee (IPC) is presentations. These forums consider risks on a cyclical basis as well as responsible for South West Water’s Investment Planning and Control when there are significant events or circumstances which have resulted procedures which controls the way capital investment is decided in a risk significantly changing. and approved, including all project expenditure approvals. The purpose of the procedures is to ensure that the principles of proper The forums also receive reports concerning assurance being performed financial control are applied throughout the inception, evaluation, in line with South West Water’s integrated assurance framework. In implementation and handover of the investment being considered. particular updates are received at each forum by the Group Internal Audit Manager and South West Water’s internal Risk and Compliance function. The Committee operates under a structured delegation of authority. Certain investments require direct approval of the Board. South West Water’s Managing Director, Finance Director and Regulatory Director and the Pennon Group Internal Audit Manager The IPC comprises all members of South West Water’s Executive attend all forums, with other members of the Executive Management Management as well as a number of Senior Managers drawn from and Senior Management attending when relevant risks and assurance South West Waters Drinking Water and Waste Water Operations as work is being considered. well as Engineering and Finance teams. The South West Water forums feed into Pennon Group Risk Forums, Contract Strategy Group (CSG) chaired by the Pennon Group Chief Financial Officer, which consider and oversee risk management across the group. The role of the Group is to develop and maintain strategies and policies to promote effective working practices in relation to the SWW’s Significant Project Governance strategic contracting relationships. South West Water also establishes project steering groups for projects which are significant to the strategy and operations of the business The role of this group includes developing the overarching governance and which require significant levels of oversight. During 2016/17 project framework for the procurement of goods and services, planning for steering groups were operating for the following key projects: and monitoring procurement and contracting approaches, reviewing recommendations for the award of strategic contracts prior to other • ‘MarketReady’ – South West Water’s internal programme to ensure it required approvals in line with delegated authority limits. was ready to comply with and fully participate with the non-household retail market from 1 April 2017. The steering group oversaw the Its responsibilities also include considering any interdependencies preparations for market opening and in particular assurance being and potential impact on other contracts as well as compliance with EU performed in respect of preparedness procurement legislation and the promotion of sustainable procurement. • Periodic Review 2019 (PR19) – This project steering group was established in 2016/17 to oversee South West Water’s preparations, A group level contract strategy body is being established. planning and delivery of its business plan for the 2020-25 regulatory period. Each of the project groups established includes all relevant members of the Executive Management and meets on a monthly basis, receiving status reports from those managing and delivering the projects.

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Assurance

South West Water’s integrated assurance In any significant area or projects where assurance is required over framework submitted data or information, certificates will be prepared by those responsible to confirm that the submission is robust and all material South West Water’s risk and assurance processes are embedded into issues have been addressed. the management of the Company and are designed to ensure risks are promptly identified, updated on a regular basis and appropriate Independent internal review is used to ensure that processes are robust mitigation is in place to suit the risk appetite. The methodology for and adhered to. identification and mitigation of risk is similar at individual business unit and corporate levels. External review and audit processes are utilised whenever significant data is provided by South West Water externally (such as the PR14 business South West Water’s integrated assurance plan ensures, utilising a risk plan, tariffs/charges submissions and Company Annual Performance and based approach, that an appropriate balance of varied providers of Regulatory Reporting). The allocation of assurance work between external assurance are deployed dependent on the assessed risk and complexity providers (including financial and technical auditors) is based upon of assurance requirements. The integrated assurance approach includes: the content of the data submission and multiple providers of external assurance are frequently engaged on the same project. The professional credentials of the third party assurance providers are considered in detail 1st Line of to ensure they have the relevant knowledge and experience. defence Robust feedback processes are established to ensure that issues or Management queries raised during internal and external assurance processes are performance reviews followed up to ensure that any changes required or follow up work is local quality control completed as appropriate. ‘sense checking’ annual certification and ‘sign off’ of In addition to strategic leadership provided by the Board, for significant submitted data. projects a Steering Group is formed to give direction, monitor project delivery and issue regular updates to the Board. The Board and Audit Committee review and challenge assurance applied in each case under this framework. 2nd Line of defence For all key projects and data submissions the Board confirm in their opinion that assurance provision, governance and internal systems of Policy setting and compliance checking control have been sufficient. business management systems internal audits The following diagram summarises the typical assurance approach taken policies and culture (e.g. whistle blowing) in any significant project involving submission of data externally: QA and ISO internal reviews risk & compliance internal reviews. Development of assurance framework and approval by the Board

3rd Line of Collation of data/information by relevant management defence

External scrutiny Departmental review and sense checks group independent internal audit financial audit technical audit Internal audit/review quality regulators (including ISO external reviews) business management systems external audits External audit/review other external assurance providers.

This risk based integrated assurance framework is applied to all areas Post review follow up procedures to address any issues of the business, including all key projects as they arise. The mix of assurance methods used is reviewed by the South West Water Audit Committee, which is responsible for ensuring robust and comprehensive assurance frameworks are in place to support Board assurance and Management and Director 'sign off' of data submission compliance requirements.

Board review of assurance and approval of the Risk and Compliance Statement southwestwater.co.uk/report2017 South West Water Limited Annual Performance Report and Regulatory Reporting 2017 51 Annual Performance Report Regulatory Reporting South West Water – integrated assurance Management providing data and commentary (whether for the framework in practice: Annual Performance Annual Performance Report or Regulatory Reporting sections) provide an explicit sign off to confirm data and commentary provided Report and Regulatory Reporting is accurate and complete utilising all available information. Similar South West Water has applied its integrated assurance framework sign-offs are provided by those involved in the validation process. to the information contained within this Annual Performance Report and Regulatory Reporting. Similar processes have been performed with regards to both the Annual Report and Financial Statements and information relating to Annual Performance Report South West Water contained within the Pennon Group Annual Report. All performance data contained within the Annual Performance Report and narrative statements are provided by relevant Results of the assurance process departments within South West Water and are reviewed by relevant The assurance process has not identified any significant deficiencies management. A full verification of data provided, ensuring it is or inaccuracies in the information reported within the Annual supported by underlying information is then carried out centrally. Performance Report and Regulatory Reporting. EY’s independent report to Ofwat and the Directors of South West Water is shown on The technical auditor, CH2M, has reviewed information contained pages 60 to 64. CH2M's report is shown on pages 65 to 66. There are within the Annual Performance Report having been provided with all no additional matters reported to management by EY or by CH2M methodologies and procedures supporting information reported. The which would indicate weaknesses or deficiencies in the process of technical auditor has access to all management who have prepared collating, validating or reporting of information contained within the data contained within the Annual Performance Report, including Annual Performance Report and Regulatory Reporting. (but not limited to) meetings arranged following the year end with all such management and the technical auditor. The technical auditor Cost Assessment tables vigorously challenges the Company’s data and methodologies where Subsequent to publication of our assurance plan, we have now appropriate and co-ordinates work with South West Water’s financial included ‘Cost Assessment’ data within the scope of this Significant auditor, Ernst & Young LLP (EY). A summary of the assurance Assurance Area (as defined in our Assurance Plan). ‘Cost provided by CH2M is included on pages 65 to 66. Assessment’ data is submitted by water companies to Ofwat to allow them to produce econometric models which predict efficient EY review the Annual Performance Report to validate that it is cost profiles across the industry. These will form part of the basis for consistent with information included within the Regulatory Reporting the 2019 Periodic Review, setting the framework for the 2020-2025 section. period, including the revenue South West Water will be able to collect from customers. We therefore consider this information important Regulatory Reporting information to apply rigorous assurance to. All tables and associated commentary within the Regulatory Reporting section are subject to audit procedures or agreed upon procedures We have applied the same levels of assurance to the Cost performed either by the financial auditor, EY, or the technical Assessment data as we have applied to section 4 of the Regulatory auditor, CH2M. Responsibilities for completing tables and associated Reporting. External assurance has been provided by PwC on the commentary are delegated to the relevant management, whose financial cost assessment tables and by CH2M over the technical information and commentary is provided to the auditors and the data. The utilisation of a separate financial assurance provider, relevant management are available for audit. that is not South West Water’s statutory auditor is in line with the Audit Committee’s policy in respect of non-statutory audit services EY’s audit of the Regulatory Reporting covering tables 1A to 2I as outlined on pages 49-50 of South West Water’s Annual Report provides an opinion that it is fairly presented and has been properly and Financial Statements. prepared in accordance with the relevant guidelines, regulation and Company policies.

EY’s report is included on pages 60 to 64. This report includes a more detailed description of the scope of their audit.

In addition to the audit performed, EY were engaged by South West Water to perform additional ‘agreed upon procedures’ in respect of tables within section 4, ensuring certain calculations and allocations were correct and supported with comprehensive methodologies.

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Assurance continued

South West Water – integrated assurance Ofwat’s Company Monitoring Framework framework in practice: non-household The water industry regulator, Ofwat, has introduced a ‘company retail market opening monitoring framework’ as a tool to oversee that customers and Another example of how this framework is applied is in respect of the other stakeholders can have confidence in the information Company’s preparations for the opening of the non-household retail that water companies report. The framework covers both data market within England from April 2017. assurance activities and wider assurance that companies perform to demonstrate they are listening to customers and delivering services Alongside other future market participants, South West Water were they want and can afford. required to submit three assurance letters in advance of April 2017 to the Market Operator (MOSL) and Ofwat. The first of these letters Companies are assessed in one of three categories, ‘self assurance,’ was submitted in February 2016. This assurance letter, signed by the ‘targeted assurance’ or ‘prescribed assurance,’ which determine Chairman (on behalf of the Board of Directors), the Chair of the Audit additional requirements that are required by companies to ensure Committee (on behalf of the Audit Committee) and the Managing trust and confidence is maintained for customers and other Director (on behalf of the Executive Team), confirmed that South stakeholders. West Water has established comprehensive programme plans which provide a high level of confidence that it will be ready for the opening In November 2016, following Ofwat’s assessment of the 2015/16 of the market. reporting cycle, South West Water were classified within the ‘targeted assurance’ category having previously been in the ‘self assurance’ The assurance letter followed extensive work which had been carried category. out under an internal project which was established in July 2014, which is steered by the Executive Directors and explicitly includes We were disappointed with this classification, having previously an ‘Assurance Task Group’. been one of only two water companies classified as ‘self assurance’ with discretion to deliver self assurance in relation to any additional The Assurance Task Group, utilising the Company’s Integrated assurance arrangements beyond base requirements. Assurance Framework, developed a specific Assurance Framework for the project which utilises a combination of internal and external The November 2016 assessment considered reporting relating to resource. Deloitte were appointed as South West Water’s external both South West Water and Bournemouth Water as both operated assurance partners for the project in November 2015. The project has as separate legal companies during 2015/16. On 1 April 2016, included more substantial ‘gateway assurance reviews’ involving both the operations of Bournemouth Water were merged into South internal resource and Deloitte. West Water.

Alongside South West Water’s assurance letter submitted in Ofwat’s assessment against a number of specific areas identified February 2016 and in line with the Company's transparent approach two areas where Ofwat had ‘minor concerns’ concerning South West to assurance reporting, South West Water submitted the report of Water’s reporting of performance, however our approach to assurance Deloitte highlighting progress, issues and management actions to met Ofwat's expectations. address these to MOSL and Ofwat. Targeted assurance companies are required to publish a ‘Risks, Strengths and Weaknesses Statement’ as well as an ‘Assurance Plan.’ During 2016/17 we published each of these in draft for consultation and then a final version reflecting the feedback obtained in the consultations with customers and other stakeholders.

As a result of these consultations, we made a number of commitments, which included the publication of:

• A Summary Performance Report, which we will publish in July, to provide a short summary of our operational performance in a user- friendly format • A Summary Assurance Report, which we will also publish in July, to provide a summary of the assurance we have undertaken, not only in respect of annual reporting, but also in respect of other areas that were identified in the Assurance Plan (or subsequently).

During 2017/18 we will consult to update both the Risks, Strengths and Weaknesses document and the Assurance Plan.

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Risk and compliance statement

Governance Our approach for producing and reviewing customer information is Regulatory Reporting consistent with Ofwat’s information principles. Customer research and The 2016/17 South West Water Annual Performance Report and feedback is acquired through our quarterly tracking survey and on Regulatory Reporting highlights company performance for the second specific topic areas to support the quality of our communications. year of the five-year ‘K6’ regulatory period (2015/16 to 2019/20). Company performance The Outcome Delivery Incentives (ODIs), which are South West Water’s Key Performance Indicators, in the report incorporate the metrics used The South West Water Board monitors and controls the performance by the South West Water Board and Ofwat, our economic regulator, to of the Company against the targets and expectations within the Final monitor performance. Determination and statutory obligations by:

In line with Ofwat’s Regulatory Reporting requirements, this risk and • setting targets and reviewing performance against key levels of compliance statement details the South West Water Board’s approach performance indicators and financial measures on a monthly basis at to governance, and compliance with its obligations to stakeholders. The Board and Executive Management level South West Water Board has in place a well established and effective • implementing Investment Planning & Control procedures to ensure set of policies and processes covering corporate governance, internal that the principles of proper financial control are applied throughout control and risk management. the inception, evaluation, implementation and handover of capital investment Statutory obligations • encouraging a culture of openness, where issues can be openly The Company has a number of statutory obligations including those discussed continuing to support a ‘Whistleblowing’ policy. detailed within the Water Industry Act, the Companies Act, the South West Water Licence, and the Competition Act. Performance against targets is measured and reported using key performance indicators which are aligned with those highlighted in this Since privatisation, the Company has developed and established Annual Performance Report. processes and procedures for ensuring obligations are adhered to in all material aspects. Compliance with obligations and performance There are appropriate systems and processes in place to identify, against targets are outlined through Regulatory Reporting. This year’s manage and review any potential material exceptions to the delivery performance is again summarised in the Company Annual Performance of outputs or changes in circumstances to that assumed within our Report and Regulatory Reporting. 2014 Final Determination. These include those which might lead to an adjustment to price limits through the revenue price caps or The South West Water Board has received reports from the business performance measures. detailing the applicable statutory Licence and regulatory obligations (for which Ofwat is the relevant enforcement authority) and the means South West Water has not identified any circumstances that have by which compliance in all material aspects with those obligations is resulted in a material variance to the Final Determination. assured within South West Water for 2016/17. Board transparency and governance Customer expectations The Company has developed approaches and appropriate processes for The South West Water Board is dedicated to developing and engaging with customers to ascertain priorities and expectations. improving the governance structures and activities in accordance with best practice and Ofwat’s Board Transparency and Governance The Company continually gathers customer feedback and engages with requirements. customers in order to understand their expectations. For 2016/17 South West Water had a fully-functioning and standalone South West Water has considered how communications adhere to Ofwat’s Board and committees. The business of the Board with associated information principles with the aim of ensuring information is accurate, Audit, Sustainability, Remuneration and Nomination committees cover a transparent, clear, accessible and timely. full range of corporate issues including strategy, performance, delivery, compliance and governance. Our Codes of Practice meet Licence conditions G, H and I providing information to customers describing the nature of the services to In accordance with the governance framework and as approved by domestic customers, giving guidance to domestic customers who have Ofwat the South West Water Board meets sequentially and on the same difficulty paying their bills and advising customers of their options and day as the Pennon Group Plc Board. rights about the help available when they have a leaking supply pipe. The governance framework introduced from April 2016 is set out in the governance section on pages 40 to 49. The regulatory ring-fence around the South West Water business is being protected through efficient and transparent decision making.

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Risk and compliance statement continued

Each Board has a ‘matters reserved’ schedule setting out its Executive Directors and Senior Managers are required to complete an responsibilities and each committee has detailed terms of reference annual ‘Certificate of Effective Internal Control’ prior to the finalisation of setting out its responsibilities and accountabilities. Further details of the the financial statements and before publishing any annual performance responsibilities of each of the Committees are set out in the report of data. The South West Water Audit Committee considers the resources each Committee on pages 46 to 60 of the Annual Report and Financial for carrying out internal audits in key company specific areas – this Statements. These, together with the risk management and internal activity is carried out by the Independent Pennon Internal Audit team. controls frameworks form an effective and robust governance structure. The South West Water Audit Committee endorses and acts on audit We will continue to review our governance structures regularly, ensuring findings from these audits carried out within the Company. There is also we continue to carry out our business in a transparent way, designed to a programme of internal audits coordinated by the Risk and Compliance secure the Company’s long-term success and profitability. Team as part of the Company’s ISO 9001:2008 and ISO 14001:2004 certifications. South West Water also has the following quality The South West Water Board of Directors comprised the Chairman accreditations/certifications: (Non-executive), three Executive Directors, and six(1) further Non- executive Directors, three of whom are also Non-executive Directors • ISO 9001:2008 (quality management) of the Pennon Group Plc. Susan Davy, Pennon Group Chief Executive • ISO 14001:2004 (environmental management) Officer also attends the South West Water Board. The Board considers • ISO 27001:2005 (information security) that the Chairman and each of the Non-executive Directors were • ISO 17025:2005 (laboratories and sampling). independent throughout the year. They are considered by the Board to have the appropriate skills, experience in their respective disciplines South West Water Board statement and personality to bring independent and objective judgement to the Board’s deliberations and to represent customers’ interests. The South West Water Board confirms that in their opinion sufficient processes and internal systems of control were in place to meet the The Company has complied with the UK Corporate Governance Company’s obligations for the twelve month period to 31 March 2017 Code 2014 subject to a number of exceptions which relate to certain for ensuring that the Company complied in all material respects with its responsibilities being reserved by the Board and Committees of Pennon legal and regulatory obligations as a water and sewerage undertaker. Group Plc (the parent company), which itself fully complies with the UK Corporate Governance Code. The exceptions are explained in the South It also confirms that in their opinion the Company Annual Performance West Water Annual Report pages 44 to 45. Report covers the issues it considers to be material to the Company and compliance with the relevant obligations. Risk management Statement of directors’ responsibilities for The system for profiling and monitoring key risks is embedded in regulatory information our normal business practices. We regularly review how we have sustained specific risk control measures, to decide if the probability Further to the requirements of company law, the Directors are required and consequence of certain risks has changed, and if necessary to to prepare accounting statements which comply with the requirements recommend further actions or investment to ensure the effectiveness of of Condition F of the Instrument of Appointment of the Company as a our corporate governance. water and sewerage undertaker under the Water Industry Act 1991 and Regulatory Accounting Guidelines issued by Ofwat. This additionally For the purposes of assessing and managing risk within South requires the Directors to: West Water, the individual departments review risks to the business associated with their accountabilities and responsibilities within the • confirm that, in their opinion, the Company has sufficient financial Company strategy. An overall risk register is updated on an ongoing resources and facilities, management resources and methods of basis as a result of any changes in the nature and extent of risks. planning and internal control for the next twelve months Through the year, risk forums (attended by members of the Executive • confirm that, in their opinion, the Company has sufficient rights and Management and Senior Management) formally review and update assets which would enable a special administrator to manage the affairs, the risk register on a quarterly basis, with a particular emphasis on business and property of the Company assessing and challenging, where necessary, the controls and mitigating • confirm that, in their opinion, the Company has contracts with any factors recorded on the risk register. Risks are also formally reviewed associate company with the necessary provisions and requirements as part of the quarterly forecasting and annual business planning concerning the standard of service to be supplied to ensure compliance processes. with the Company’s obligations as a water and sewerage undertaker • report to Ofwat changes in the Company’s activities which may be material in relation to the Company’s ability to finance its regulated activities undertake transactions entered into by the appointed business, with or for the benefit of associated companies or other (1) One of the Non-Executive Directors, Mr S Johnson resigned as a Director of South West Water on businesses or activities of the appointed business, at arm’s length 28 April 2016. Recruitment for his replacement is underway. • keep proper accounting records which comply with Condition F.

These responsibilities are additional to those already set out in the statutory financial statements.

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In the case of each of the persons who are Directors at the time when Regulatory Reporting Principal risk Matters considered by the the report is approved under Section 418 of the Companies Act 2006 Audit Committee the following applies: Cyber security Review of the cyber security a. So far as the Director is aware, there is no relevant audit information framework in place of which the Company’s auditors are unaware Financial markets Ability to manage external shocks b. He/she has taken all the steps that he/she ought to have taken as a or potential market disclosures Director in order to make himself/ herself aware of any relevant audit that could impact on financing information and to establish that the Company’s auditors are aware strategy of that information. ‘Brexit’ Initial assessments of the The Directors are responsible for the maintenance and integrity of the implications and mitigations Company’s website. Legislation in the United Kingdom governing the Wholesale energy Review of energy risk strategy to preparation and dissemination of financial statements may differ from mitigate volatility in the wholesale legislation in other jurisdictions. energy market Licence of Appointment – statement relating Drinking water contamination Review the risk to drinking water to Condition P quality in the event of significant water contamination The Board of Directors of South West Water Limited has resolved that Legislative and regulatory Management of changes in EU a Certificate be issued to the Water Services Regulation Authority compliance and UK legislation and regulation, confirming that in the opinion of the Board, South West Water would be including the impact of ‘Brexit’ able to maintain an Issuer Credit Rating which is investment grade. Debt collection Non-recovery of household debt In making this declaration, the Board has received external independent risks and mitigations assurance over this assessment and has taken into account the following Recruitment and retention Review of people risks including main factors in giving its opinion: the ability to attract and retain the right skills to deliver strategy • key financial metrics including: adjusted interest cover; net debt / regulated asset base; FFO / net debt and RCV / net debt Water resources and resilience Consider the impact of climate • ownership and availability of assets where assets are held outright change and drought risks on in perpetuity water resources and ongoing • the capital programme over the current and future regulatory period resilience as a proportion of the regulated asset base • financial policies, including dividend policy. It was determined that none of the individual risks would in isolation compromise the Company’s viability, so a number of plausible risk combinations were considered to stress test the plan, primarily by Long term financial resilience reducing revenues, increasing costs and impacting cash flows. The Aligned with our viability statement within the Annual Report (page 29) Board considered the monetary impact of these scenarios over a the Board has assessed the Company’s long-term financial resilience and five-year period, to ensure that they did not adversely impact the confirms that it has a reasonable expectation that the Company will be Company’s viability. able to continue in operation having made this assessment over a five-year period. The assessment has been made with reference to the Company’s The five-year period was chosen with regard to the length of the current position and prospects, its longer-term strategy, the Board’s risk business’s regulatory contract and the associated business planning appetite and the Company’s principal risks and how these are managed, cycle, and the longer-term nature of the Company. as detailed on pages 23 to 28 of the Risk Report within the Annual Report and Financial Statements. In making the assessment, the Directors have taken account of the Company’s robust capital solvency position, its ability to raise new The Company’s strategic business plan and associated principal risks finance and a key potential mitigating action of restricting any non- are a foundation of the scenario testing. This assessment has considered contractual payments. the potential impact of arising risks on the business model, future performance, solvency and liquidity over the period in question. In making In assessing the prospects of the Company, the Directors note that as their assessment, the Directors reviewed the principal risks and considered the Company operates in a regulated industry which potentially can which risks might threaten viability. be subject to non-market influences, such assessment is subject to uncertainty, the level of which depends on the proximity of the time Over the course of the year the Audit Committee has considered a horizon, and accordingly the future outcomes cannot be guaranteed deep-dive review of the following principal risks to enable a thorough or predicted with certainty. assessment of the impact of these risks on ongoing viability:

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REGULATORY REPORTING

Risk and compliance statement continued

As set out in the Audit Committee’s report on pages 46 to 52, South West Water has complied with other aspects of Condition R and the Directors reviewed and discussed the process undertaken by Market Codes in respect of the Non-household retail market. management, and also reviewed the results of the stress testing performed. In making this assessment, the Directors have taken into account:

Licence of Appointment – statement relating • South West Water’s Compliance Code (available on southwestwater.co.uk) to Condition F • Internal processes for monitoring compliance against South West Water’s Code The Board of Directors of South West Water Limited has resolved that • Internal and external assurance provided as part of the Company’s a Certificate be issued to the Water Services Regulation Authority preparations for the opening of the non-household retail market. confirming:

1. That in the opinion of the Directors, the Company will have available Name & Position Signed to it sufficient financial resources and facilities to enable it to carry Sir John Parker out, for at least the next twelve months, the Regulated Activities Chairman (including the investment programme necessary to fulfil the Company’s obligations under the Appointment) 2. That in the opinion of the Directors, the Company will, for at least the Chris Loughlin next twelve months, have available to it management resources which Pennon Group are sufficient to enable it to carry out those functions. Chief Executive Stephen Bird In making this declaration, the Directors have taken into account: Managing Director

• the net worth of the Company and the strength of key performance indicators as shown in the Company Annual Performance Report for Louise Rowe the year ended 31 March 2017 and the Company’s business plan for Finance Director the remaining K period • borrowing facilities which include significant committed undrawn Martin Angle bank facilities Non-executive Director • parental support provided by the holding company which will provide financial support to the Company to enable it to meet its liabilities as they fall due Neil Cooper • the Company’s formal risk management process which reviews, Non-executive Director monitors and reports on the Company’s risks and mitigating controls and considers potential impact in terms of service, compliance, value, people, society and partners Martin Hagen • the Company’s employment policies and strategy. Non-executive Director

The Directors also declare that in their opinion all contracts entered Gill Rider into with any Associated Company, include all necessary provisions and Non-executive Director requirements concerning the standard of service to be supplied to the Company to ensure that it is able to meet all its obligations as a water and sewerage undertaker, as required in Section 6A.2A(3) of Condition Lord Taylor F of the Instrument of Appointment. This opinion has been formed of Goss Moor following examination of the documents in question. Non-executive Director Susan Davy Licence of Appointment – statement relating to Pennon Group Chief Condition R and Market Codes in respect of the Financial Officer Non-household market At 31 March 2017 the Company had in place an Access Code compliant with paragraphs 2 to 4 of Condition R of the Licence from the Secretary of State for the Environment, and that South West Water has complied with this Code.

South West Water has also ensured that every transaction between itself and a related licensed water supplier is at arm’s length and does not make available to the related licensed water supplier any of its other assets.

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Accounting disclosures

Basis of preparation The performance related remuneration of Chris Loughlin, as Chief Regulatory Reporting Executive Officer of Pennon Group Plc expressed as a percentage of These regulatory accounts are prepared in accordance with regulatory salary up to a maximum of 100% (of which 50% is received as deferred accounting guidelines issued by the Water Services Regulation Pennon Group shares) was as follows: Authority (Ofwat), specifically: • 30% earnings per share (EPS) performance of Pennon • RAG 1.07 – Principles and guidelines for Regulatory Reporting Group Plc • RAG 2.06 – Guideline for classification of costs across the price • 20% for the average of South West Water specific controls performance (in respect to targets which related to operating profit, • RAG 3.09 – Guideline for the format and disclosures for the Annual net debt, the position the Company achieved in the Service Incentive Performance Report Mechanism and the achievement of a range of service standards set • RAG 4.06 – Guideline for the table definitions in the Annual for the Company by Ofwat Performance Report • 20% for the average of Viridor specific performance as detailed • RAG 5.06 – Guideline for transfer pricing. on page 84 of the South West Water Annual Report and Financial Statements They have been prepared under the historical cost convention, as • 30% for achievement of personal strategic objectives. modified by the revaluation of certain financial instruments, and in accordance with International Financial Reporting Standards (IFRSs) as The payments for other Executive Directors relating to the year 2016/17 adopted by the European Union except for the dis-application of certain expressed as a percentage of salary up to a maximum of 75% (of which parts of IAS18 in respect of the probability of collection of billed revenue 37.5% is received as deferred Pennon Group Plc shares) were as follows: and IAS23 in relation to the capitalisation of interest incurred during the construction phase of items of ‘property plant and equipment.’ • 45% for the average of South West Water specific performance (in The detailed accounting policies applied by South West Water are set respect to targets which related to operating profit, net debt and the out on pages 112 to 117 of our Annual Report and Financial Statements. achievement of a range of service standards, including the Service Incentive Mechanism, set for the Company by Ofwat The accounting policies and disclosures set out below are those • 30% for achievement of personal strategic objectives. specifically required within RAG 3.09. These arrangements for 2016/17 were approved by the Remuneration These regulatory accounts were approved by the Board Committee. Any changes in these arrangements for 2017/18 are noted of Directors on 13 July 2017. in the Remuneration Report, included within the South West Water Annual Report and Financial Statements (pages 64 to 93). This report Directors emoluments is available online at southwestwater.co.uk/report2017. Payments related to performance against agreed standards Dividend policy As required by the Water Act 2014 and Regulatory Accounting South West Water has established a dividend policy which involves Guidance from the Water Services Regulation Authority (Ofwat), the following components: additional information is given regarding this aspect of remuneration. • a sustainable level of base dividend growth, determined Full and detailed disclosures of Directors’ remuneration are included by a number of factors including the shareholders’ investment and on pages 64 to 93 of the South West Water Annual Report and the cost of capital Financial Statements including details of the performance related • a further level of growth funded by efficiency out-performance bonus arrangements and the amounts paid to Directors under • comparison with the assumptions made by Ofwat in setting prices those arrangements. for the regulatory period.

Dividend payments are designed to ensure that key financial ratios are not prejudiced, whilst also taking into account balance sheet considerations.

Payments are also designed to ensure that the ability of the appointed business to finance its activities is not impaired.

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Accounting disclosures continued

Dividends totalling £213.1m (2015/16: £74.9m) were paid to the parent Services undertaking, representing a base dividend of £58.4m, £54.7m of The allocation of operating costs within South West Water outperformance dividend based on performance for 2015/16 and £100m to specific service areas within the appointed business is based on taking into consideration the balance sheet position and key gearing activity analysis and principles which result in both direct and support financial ratio to align with Ofwat's notional structure. costs being apportioned where not directly attributed. Activity levels between individual services are ascertained by reference to time The base dividend was calculated with reference to the projections in allocations by individual employees along with other allocation bases in the Ofwat 2014 Final Determination and the assumptions for 2015/16 accordance with the underlying nature of resource utilisation. included within the 2015-20 Business Plan. A full ‘accounting separation’ methodology statement can be found at Accounting policy note for price control segments www.southwestwater.co.uk. The methodology statement explains in In accordance with Regulatory Accounting Guideline 4.06 – ‘Guideline detail the basis of allocations for costs and assets. for the definitions table definitions in the Annual Performance Report’, published in October 2016 and subsequent information notices Revenue recognition published by Ofwat, a segmental income statement (table 2A) and other Revenue represents the income receivable in the ordinary course of segmental analysis (tables 2B to 2I) are presented within the Regulatory business in the year exclusive of value added tax. Charges billed to Reporting. customers for water and sewerage services are recognised in the period in which they are earned. An accrual is estimated for measured consumption This segmental analysis separates certain financial and non-financial that has not yet been billed. information between the following four regulatory price controls: The measured income accrual is an estimation of the amount • wholesale water of mains water and wastewater charges unbilled at the year end. The • wholesale wastewater accrual for unbilled charges is estimated using a defined methodology • retail household reflecting historical consumption, estimated demand trends and current • retail non-household. tariffs. The measured income accrual is recognised within revenue. The methodology for calculating the measured income accrual is consistent Whilst these business units are not treated as organisationally separate with that applied in 2015/16. A retrospective review of the 2015/16 businesses or separate companies by South West Water there are measured income accrual and the amounts actually billed during 2016/17 certain activities which are solely carried out by specific areas of the which would be expected to align to the accrual was performed and there business due to more efficient and effective structures being in place was no material difference. to support the management and accountability of the business. Revenue is only recognised when the occupiers name is known. New Certain departments (especially operational departments) may provide properties are recognised when reported as connected. Unoccupied services for one regulatory price control segment, however many other properties are identified through physical inspection, mailings and departments perform services across two or more regulatory price customer contacts. These properties are given a void status within the control segments. Certain financial and non-financial information is billing system, they are not billed speculatively (that is to ‘the occupier’) therefore separated based upon a methodology which includes some and revenue is not recognised against these properties. assumptions and judgements utilising all available information. Where an invoice has been raised or payment made but the service As the price controls are not organisationally separated in South West has not been provided in the year this will be treated as a payment in Water they do not have their own separate management and support advance. This will not be recognised within the current year’s revenue functions and they do not trade with one another. To represent them but will instead be recognised within creditors. as distinct controls requires the allocation of costs and assets to them. Charges on income arising from court, solicitor and debt recovery agency Wherever possible, direct costs and assets have been directly attributed fees are credited to operating costs and added to the relevant customer to business units. Where this is not possible, appropriate cost allocations account. They are not recognised within turnover. have been applied linked the key metric which best reflects the nature of the activity and costs. A summary of the differences between revenue recognised in the statutory financial statements and Regulatory Reporting is included on The allocation between activities is reviewed annually to ensure the page 67. basis of allocation is still appropriate.

Where no direct allocation is possible management judgement is applied to allocate costs separately. The resulting costs reported for these business units do not necessarily represent what the costs would be if they were operated as separate business units.

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Within the statutory accounts, and in line with IAS18, revenue is ii) Other assets (including property, overground plant Regulatory Reporting only recognised if it is deemed probable that the economic benefits and equipment) associated with the transaction will flow to South West Water (i.e. it Other assets are included at cost less accumulated depreciation. is probable will be collected given all available information such as customer payment history). Within the Regulatory Accounts, in a Freehold land is not depreciated. Other assets are depreciated deviation from IAS18 in line with Ofwat RAG 1.07, revenue is recognised evenly over their estimated economic lives to their residual value for all properties where a service is being received even where it would and are principally: not be deemed probable it would be collected. This difference in accounting treatment has resulted in £7.1m of revenue recognised within Freehold buildings 30 – 60 years the Regulatory Reporting which is not recognised as revenue within the Operational properties 40 – 80 years Financial Statements. Fixed plant 20 – 40 years Vehicles, mobile plant and computers 4 – 10 years Following this accounting treatment an additional £7.1m is recognised as a bad debt charge within operating expenses compared to the statutory Assets in the course of construction are not depreciated financial statements, which results in no difference in operating profit or until commissioned. profit before tax. The cost of assets includes directly attributable labour and overhead Capitalisation policy note costs which are incremental to the Company. Assets transferred The cost of property, plant and equipment capitalised includes the from customers are recognised at fair value. original purchase price of the asset and costs attributable to bringing the asset to its working condition for its intended use. The cost of The assets’ residual values and useful lives are reviewed annually. assets includes directly attributable labour and overhead costs which are incremental to the Company. Costs which meet the criteria for a Gains or losses on disposals are determined by comparing the proceeds capital asset and total in excess of £1,000 are capitalised. of sale with the carrying amount and are recognised within the income statement. Plant, property and equipment includes: i) Infrastructure assets (being water mains and sewers, impounding In line with IAS23, within the Statutory Accounts and Financial and pumped raw water storage reservoirs, dams, pipelines and Statements, borrowing costs directly attributable to the construction sea outfalls) of a qualifying asset (an asset necessarily taking a substantial period Infrastructure assets were included at fair value on transition to IFRS of time to be prepared for its intended use) are capitalised as part of and subsequent additions at cost, less accumulated depreciation. the asset. However within the Regulatory Reporting, in a deviation Expenditure to increase capacity or enhance infrastructure assets from IAS23 and in line with Ofwat RAG 3.09, borrowing costs are is capitalised where it can be reliably measured and it is probable not capitalised. that incremental future economic benefits will flow to the Company. The cost of day to day servicing of infrastructure components is Bad debt note recognised in the income statement as it arises. At the balance sheet date the Company evaluates the collectability of trade receivables and records provisions for doubtful debts based on Infrastructure assets are depreciated evenly over their useful experience including comparisons of the relative age of accounts and economic lives and are principally: consideration of actual write-off history.

Dams and impounding reservoirs 200 years The actual level of debt collected may differ from the estimated levels Water mains 40 – 120 years of recovery. As at 31 March 2017 the Company’s current amounts Sewers 40 – 120 years receivable from customers were £210.4m, against which £91.4m had been provided for impairment. Assets in the course of construction are not depreciated until commissioned. Debt is written off only when all methods have been used to trace previous occupiers.

There has been no change to the write-off policy or bad debt provisioning policy. Year on year movements in the trade debtor balance are discussed in the ‘Financial Performance’ section.

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REGULATORY REPORTING

Independent Auditors’ report to the Water Services Regulation Authority (the WSRA) and the Directors of South West Water Limited Opinion on Annual Performance Report • the regulatory price review and other segmental reporting tables comprising the segmental income statement (table 2A), the totex In our opinion, South West Water Limited’s Regulatory Accounting analysis for wholesale water and wastewater (table 2B), the operating Statements within the Annual Performance Report: cost analysis for retail (table 2C), the historical cost analysis of fixed • have been properly prepared in accordance with Condition F, the assets for wholesale and retail (table 2D), the analysis of capital Regulatory Accounting Guidelines issued by the WSRA (RAG 1.07, contributions and land sales for wholesale (table 2E), the household RAG 2.06, RAG 3.09, RAG 4.06 and RAG 5.06) and the accounting water revenues by customer type (table 2F), the non-household water policies (including the company’s published accounting separation revenues by customer type (table 2G), the non-household wastewater methodology, as defined in RAG 3.09, appendix 3), set out on page 58. revenues by customer type (table 2H) and the revenue analysis by customer type (table 2I) and the related notes. Emphasis of matter - basis of preparation The financial reporting framework that has been applied in their Without modifying our opinion on the Regulatory Accounting preparation comprises Condition F, the Regulatory Accounting Statements within the Annual Performance Report, we draw attention Guidelines issued by the WSRA and the accounting policies (including to the fact that the Annual Performance Report has been prepared in the Company’s published accounting separation methodology, as accordance with Condition F, the Regulatory Accounting Guidelines, defined in RAG 3.09, appendix 3) set out in the notes to the Annual the accounting policies (including the company’s published accounting Performance Report. separation methodology, as defined in RAG 3.09, appendix 3) set out in the statement of accounting policies and under the historical cost In applying the financial reporting framework, the directors have made a convention. The nature, form and content of the Regulatory Accounts number of subjective judgements, for example in respect of significant statements are determined by the WSRA. It is not appropriate for us to accounting estimates. In making such estimates, they have made assess whether the nature of the information being reported upon is assumptions and considered future events. suitable or appropriate for the WSRA’s purposes. Accordingly we make no such assessment. We have not audited the Outcome performance table (tables 3A to 3D) and the additional regulatory information in tables 4A to 4I. The Annual Performance Report is separate from the statutory financial statements of the Company and has not been prepared under the This report is made, on terms that have been agreed, solely to the basis of International Financial Reporting Standards as adopted by the Company and the WSRA in order to meet the requirements of Condition European Union (“IFRSs”). Financial information other than that prepared F of the Instrument of Appointment granted by the Secretary of State on the basis of IFRSs does not necessarily represent a true and fair for the Environment to the Company as a water and sewage undertaker view of the financial performance or financial position of a company as under the Water Industry Act 1991 (“Condition F”). Our audit work shown in statutory financial statements prepared in accordance with the has been undertaken so that we might state to the Company and Companies Act 2006. the WSRA those matters that we have agreed to state to them in our report, in order (a) to assist the Company to meet its obligation under The Regulatory Accounting Statements on pages 67 to 102 have Condition F to procure such a report and (b) to facilitate the carrying been drawn up in accordance with Regulatory Accounting Guidelines out by the WSRA of its regulatory functions, and for no other purpose. with a number of departures from IFRSs. A summary of the effect of To the fullest extent permitted by law, we do not accept or assume these departures from Generally Accepted Accounting Practice in the responsibility to anyone other than the Company and the WSRA, for our Company’s statutory financial statements is included in the tables within audit work, for this report or for the opinions we have formed. section 1. Our assessment of risks of material What we have audited misstatement The tables within South West Water Limited’s Annual Performance We identified the risks of material misstatement described below as Report that we have audited (“the Regulatory Accounting Statements”) those that had the greatest effect on our overall audit strategy; the comprise: allocation of resources in the audit; and direction of the efforts of the audit team. The identified risks are consistent with prior year. In • the regulatory financial reporting tables comprising the income addressing these risks, we have performed the procedures below which statement (table 1A), the statement of comprehensive income (table were designed in the context of the financial statements as a whole and, 1B), the statement of financial position (table 1C), the statement of consequently, we do not express any opinion on these individual areas. cash flows (table 1D) and the net debt analysis (table 1E) and the related notes; and

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Risk Risk direction Our response to the risk What we concluded to the Audit Regulatory Reporting Committee Revenue recognition across the Our procedures include: We concluded that the basis Company’s operations , of calculation of the measured Please refer to the published Annual • We obtained an understanding of the income accrual is appropriate. Report and Financial Statements, Audit process for the supply of measured Management assumptions in Committee Report (page 48); Accounting services, meter reading and related billing respect of customer demand are policies (page 112); and Note 4 of the in order to challenge the completeness within an acceptable range. Financial Statements (page 119) of adjustments to reflect the accrual or Amounts identified as advance deferral of revenue. billing have been correctly The Company’s material revenue streams • We tested key controls linked to system recorded. relate to the provision of water and generated information relating to the sewerage services. ISAs (UK & Ireland) estimation process for measured revenue. presume there is a risk of fraud relating • We compared the accrued income to to revenue recognition. For the Company, bills raised post year end for a sample of given targets associated to financial customers, and compared management’s performance and pressures to meet market history of estimating the accrued expectations, there is an incentive to income balance to bills raised in the overstate revenue. This risk over revenue subsequent year. recognition specifically arises in the • We performed a walkthrough of the following judgemental areas, where there is process for unmeasured revenue and the opportunity to overstate revenue: annual billing cycle. • We performed controls testing related • Income from measured water services to the calculation of system generated requires an estimation of the amount of billing for unmeasured revenue. unbilled charges at the year end. This is • We obtained details of the billing runs calculated using a combination of system in February and March and assessed generated information, based on previous whether there were any other billing runs customer volume usage, together with for unmeasured revenue that should be management judgements as to the likely excluded from 2016/17 total revenue. impact on usage of factors such as recent • We corroborated the key assumptions weather patterns. The accrued income and estimates made by management balance at 31 March 2017 is £72.2m (2016: in recognising revenue, by obtaining £67.8m). internal and external data on factors that • For unmeasured revenue, the bills for influence demand from customers. each calendar year are raised in advance • We tested whether revenue was for the next financial year. There is a recognised at the correct time in risk that revenues are recorded in the accordance with IFRS. incorrect period, if the advance billing • We performed analytical procedures element is not properly excluded and by comparing revenue balances for the carried forward in the balance sheet. year against expectation and obtaining support for significant variances. • We tested a sample of transactions to underlying bills for both types of revenue. • In performing our journal testing, we paid increased attention to entries impacting revenue focusing on non-system postings and those raised in the last two weeks of the year.

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REGULATORY REPORTING

Independent Auditors’ report to the Water Services Regulation Authority (the WSRA) and the Directors of South West Water Limited continued Risk Risk direction Our response to the risk What we concluded to the Audit Committee Valuation of the provision for doubtful Our procedures include: We concluded that the doubtful debts , debt provision is within an Please refer to the published Annual • We performed a walkthrough of the acceptable range and reflects Report and Financial Statements, Audit process for calculating the bad debt recent history of collection of Committee Report (page 48); Accounting provision and assessed the design outstanding debts. policies (page 115); and Note 4 of the effectiveness of key controls. Annual Report and Financial Statements • We tested the operating effectiveness of (page 119) key controls over the integrity of data and the report utilised to generate the ageing As shown in note 18, there is a provision and categorisation of debt within the of £91.4m (2016: £88.7m) at the year end Company’s billing system. against gross amounts receivable from • We tested historic data on collection rates customers of £210.4m (2016: £191.8m). and evaluated how this data was used in the preparation of the bad debt provision. The provision is calculated using a • We corroborated the assumptions used combination of system generated by management in determining the information on historic debt recovery rates amounts provided against the different and management’s judgement of the future categories and age of debt, by comparing likely recovery rates. these assumptions to historic collection rates and by considering the impact During the year management has of changes in the methods adopted performed a data mining exercise to operationally by management to collect refresh the detailed collection data by debt, and in the external environment. category of debt. • We utilised collection information over the past three years, to determine a range There is a risk that the assumptions used of the likely ultimate collection of debts by management in calculating the bad existing at the balance sheet date and debt provision may be susceptible to compared this to the provision recorded management bias and the valuation of the by management, including assessing provision against trade receivables may be assumptions for evidence of management misstated. bias. • We tested the appropriateness of journal entries and adjustments impacting the doubtful debt provision in the particularly those raised close to the balance sheet date. Valuation of property, plant and Our procedures include: We concluded that fixed assets equipment , have been correctly accounted Please refer to the published Annual Report • We tested the classification of for in the financial statements. and Financial Statements, Accounting expenditure between capital and policies (page 113); and Note 4 of the operating, considering whether the Annual Report and Financial Statements expenditure recorded as property, plant (page 120) and equipment meets the definitions set out in IAS 16 ‘Property, Plant and As shown in note 14, the carrying value Equipment’. of the Company’s property, plant and • We tested the asset lives utilised based equipment totals £2,899.8m (2016: on latest third party benchmarking. £2,659.9m). • We re-performed the calculation of depreciation. Given targets associated to financial • We read the disclosures in the Annual performance and also pressures to meet Report and Financial Statements in market expectations, there is a risk respect of the change in asset lives and that expenditure might be improperly evaluated the adequacy of these. recognised as capital, rather than operating and that the depreciation charge may be understated if inappropriate useful economic lives are used.

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Our application of materiality Respective responsibilities of the WSRA, the Regulatory Reporting The magnitude of an omission or misstatement that, individually or in Directors and Auditors the aggregate, could reasonably be expected to influence the economic As explained more fully in the Statement of Directors’ Responsibilities decisions of the users of the financial statements. Materiality provides a set out on page 54 to 55, the directors are responsible for the basis for determining the nature and extent of our audit procedures. preparation of the Annual Performance Report in accordance with Condition F, the Regulatory Accounting Guidelines issued by the WSRA We determined materiality for the Company to be £8.7m (2016: £8m), and the Company’s accounting policies (including the Company’s which is 5% (2016: 5%) of profit before taxation before non-underlying published accounting separation methodology, as defined in RAG 3.09, items. We believe that profit before taxation before non-underlying appendix 3). items provides us with an appropriate measure of the underlying performance of the Company. We excluded non-underlying items on Our responsibility is to audit and express an opinion on the Regulatory the basis that these are infrequent in occurrence and profit before Accounting Statements within the Annual Performance Report in taxation after non-underlying items is not indicative of the underlying accordance with International Standards on Auditing (UK and Ireland) performance of the Company. We also note that market and analyst (“ISAs (UK & Ireland)”), except as stated in the section on ‘What an audit commentary on the performance of the Company uses the same of the Annual Performance report involves’ below, and having regard to measure. We therefore, considered profit before taxation before non- the guidance contained in ICAEW Technical Release Tech 02/16 AAF underlying items to be the most relevant performance metric on which ‘Reporting to Regulators on Regulatory Accounts’ issued by the Institute to base our materiality calculation. of Chartered Accountants in England and Wales. Those standards require us to comply with the Auditing Practices Board’s Ethical An overview of the scope of our audit Standards for Auditors. Tailoring the scope The Company’s operations are based solely in the South West of What an audit of the Annual Performance England and therefore all audit procedures are completed by one audit Report involves team at the Company’s headquarters. An audit involves obtaining evidence about the amounts and disclosures in the Regulatory Accounting Statements sufficient to give Changes from the prior year reasonable assurance that the Regulatory Accounting Statements With effect from 1 April 2016, the operations and licence of within the Annual Performance Report are free from material Bournemouth Water were merged with South West Water and therefore misstatement, whether caused by fraud or error. This includes an these financial statements include the results, assets and liabilities of assessment of: whether the accounting policies are appropriate to the the combined activities throughout the year ended 31 March 2017 and company’s circumstances and have been consistently applied and have been included in all our audit procedures. adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the Our application of materiality Annual Performance Report. In addition, we read all the financial and We apply the concept of materiality in planning and performing the non-financial information in the Annual Performance Report and audit, in evaluating the effect of identified misstatements on the audit Regulatory Reporting to identify material inconsistencies with the and in forming our audit opinion. audited tables within the Annual Performance Report and to identify any information that is apparently materially incorrect based on, or Performance materiality materially inconsistent with, the knowledge acquired by us in the course The application of materiality at the individual account or balance of performing the audit. If we become aware of any apparent material level. It is set at an amount to reduce to an appropriately low level misstatements or inconsistencies we consider the implications for the probability that the aggregate of uncorrected and undetected our report. misstatements exceeds materiality. We have not assessed whether the accounting policies are appropriate On the basis of our risk assessments, together with our assessment of to the circumstances of the Company where these are laid down by the Company’s overall control environment, our judgement was that Condition F. Where Condition F does not give specific guidance on the performance materiality was 75% (2016: 75%) of our planning materiality, accounting policies to be followed, our audit includes an assessment of namely £6.5m (2016: £6m). This is based on our assessment of the whether the accounting policies adopted in respect of the transactions Company’s internal control environment and the extent and nature of and balances required to be included in the Annual Performance Report audit findings identified in the prior period and is consistent with the are consistent with those used in the preparation of the statutory prior year. financial statements of the company. Furthermore, as the nature, form and content of Annual Performance Report is determined by the WSRA, we did not evaluate the overall adequacy of the presentation of the information, which would have been required if we were to express an audit opinion under International Standards on Auditing (UK & Ireland).

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REGULATORY REPORTING

Independent Auditors’ report to the Water Services Regulation Authority (the WSRA) and the Directors of South West Water Limited continued The Company has presented the allocation of operating costs and Other matters assets in accordance with the accounting policy for price control Our opinion on the Regulatory Accounting Statements within the segments set out on page 58 and its Accounting Separation Annual Performance Report is separate from our opinion on the Methodology Statement published on the Company’s website on statutory financial statements of the Company for the year ended 31 14 July 2017. We are not required to assess whether the methods of March 2017 on which we reported on 30 May 2017, which are prepared cost allocation set out in the Methodology Statement are appropriate for a different purpose. Our audit report in relation to the statutory to the circumstances of the Company or whether they meet the financial statements of the Company (our “Statutory audit”) was made requirements of the WSRA, which would have been required if we were solely to the Company’s members, as a body, in accordance with to express an audit opinion under International Standards on Auditing Chapter 3 of Part 16 of the Companies Act 2006. Our Statutory audit (UK & Ireland). work was undertaken so that we might state to the Company’s members those matters we are required to state to them in a statutory audit Opinion on other matters prescribed by report and for no other purpose. In these circumstances, to the fullest Condition F extent permitted by law, we do not accept or assume responsibility for any other purpose or to any other person to whom our Statutory audit Under the terms of our contract we have assumed responsibility to report is shown or into whose hands it may come save where expressly provide those additional opinions required by Condition F in relation agreed by our prior consent in writing. to the accounting records. In our opinion: • proper accounting records have been kept by the appointee as required by paragraph 3 of Condition F; and Ernst & Young LLP • the Regulatory Accounting Statements are in agreement with the Statutory auditor accounting records and returns retained for the purpose of preparing Reading the Annual Performance Report. 13 July 2017 Matters on which we are required to report by exception We have nothing to report in respect of the following matters where under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Performance Report and Regulatory Reporting is:

• materially inconsistent with the information in the audited Regulatory Accounting Statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Company acquired in the course of performing our audit; or • otherwise misleading.

In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the Annual Performance Report and Regulatory Reporting is fair, balanced and understandable and whether the Annual Performance Report appropriately discloses those matters that we communicated to the Audit Committee which we consider should be disclosed.

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Technical Auditors’ Report

Introduction Audit Opinion Regulatory Reporting South West Water has a set of eight Outcomes with 42 Performance Whilst our audits have identified a very small number of minor exceptions Commitments (PCs) 18 of which have financial penalties or rewards and aspects to monitor to ensure performance in the current year, we incentives (Outcome Delivery Incentives (ODIs)) which were mandated in are pleased to provide assurance that, overall, we consider the published the 2014 Final Determination. The Company is monitoring and measuring ODI information has been compiled using information which is accurate, its performance throughout the 2015 to 2010 period to ensure it meets its reliable and complete. We have traced information to data sources and agreed targets. South West Water is publishing its progress as at 31 March information systems. We consider the published metrics provide a fair and 2017 against the targets set in the 2014 Final Determination. reasonable account of South West Water’s performance in 2016/17 in both areas. Bournemouth Water (BW) has a set of six Outcomes with 15 Performance Commitments (PCs) ten of which have financial penalties or rewards Item RAG Opinion incentives (Outcome Delivery Incentives (ODIs)) which were mandated in the 2014 Final Determination. The Company is monitoring and measuring ODI information Our audit enables us to conclude that its performance throughout the 2015 to 2020 period to ensure it meets the ODI information reported at 31 March its agreed targets. SWW is publishing BW’s progress as at 31 March 2017 2017 is accurate, reliable and complete. against the targets set in the 2014 Final Determination. We consider the reported metrics present an accurate picture of South Progress is monitored monthly by Senior Management and the Directors West Water’s progress towards achieving via the Directors’ Report. In addition, the independent customer group, its 2020 targets. WaterFuture, which represents SWW’s customers also monitors SWW’s performance against its PCs to challenge the Company and ensure that We confirmed that information is soundly its performance remains on track. based, for most ODIs using company gathered audited data as the source As part of our independent audit and assurance of South West Water's information. Where information is not Annual Performance Report and Regulatory Reporting, South West Water sourced from company gathered audited engaged us to independently audit and assure the reported performance data, we confirmed robust systems commitments and ODI metrics. The purpose of the audit was to review are in place to capture the required the methodologies for compiling the information and provide an opinion information. on the accuracy, reliability and completeness of the data. South West Water has continued to collect data for its internal use. Key elements of this data feed into the ODI calculations hence our audits of the ODIs were The Red / Amber / Green (RAG) assessments follow the general combined with the other audit activity. definitions opposite for which we have established criteria (detailed in the Summary of Audit Findings) reports to evaluate a level of exception. Our audits commenced in March 2017 with a series of process/ methodology audits of key areas, followed by detailed data audits in April Our key audit findings are detailed in this report below, followed by 2017. Our data audits incorporated nine ‘audit tests’ which challenged the specific observations and/or recommendations in the Observations & data, systems and processes to assess them against Red/Amber/Green Exceptions reports where we provide detail on any ‘non-Green’ items. (RAG) materiality criteria. These tests are set out in the RAG matrices which confirm our audit findings. All exceptions (i.e. ‘non Green’) have Key been identified and reported in more detail in the Exception Reports. No exceptions and compliant with the requirement(s) Minor exceptions This Assurance Report provides independent assurance to the Executive Material exceptions Management Board that the reported PC and ODI performance is Non-material observation on supporting information or otherwise accurate, reliable and complete. We also confirm that information is noteworthy issue. consistent with supporting data sets and commentaries used for internal purposes to operate and monitor the performance of the business.

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Technical Auditors’ Report continued

ODI Key Findings - South West Water ODI Key Findings - Bournemouth Water We have assessed the information within our scope against the audit We have assessed the information within our scope against the audit tests listed above and can confirm that we are satisfied that ODI tests listed above and can confirm that we are satisfied that ODI information provides a fair and reasonable account of SWW’s progress information provides a fair and reasonable account of BW’s progress against its ODIs after year 2 of K6. Our audits enable us to confirm: against its ODIs after year 2 of K6. Our audits enable us to confirm:

• Levels of compliance with SWW’s internal requirements, Ofwat’s former • Each ODI has Terms of Reference which is an internal controlled JR11 requirements and definitions of performance commitments document recording the definition of the ODI, the 2020 target, reward & ODIs in the 2014 Final Determination have remained high in all or penalty (financial and/or reputational), the responsibility of the functions despite staff and organisational changes. relevant department to achieve the target, the methodology by which • Progress with the ODIs is reported monthly through the Directors’ performance is monitored and the requirement for monthly reporting Report which is reviewed by the Executive Management Board and • Levels of compliance with SWW’s/BW’s internal requirements, ODI Board which demonstrates thorough governance. Ofwat’s former JR11 requirements and definitions of performance • Sewer flooding (other causes), repeat floodings, and overall size commitments & ODIs in the 2014 Final Determination have remained of internal flooding register all show improvement over previous high in all functions despite staff and organisational changes. year: DG5 register and sewer flooding (other causes) show best • Progress with the ODIs is reported monthly through the Directors’ performance since at least 07/08. This is mainly due to network Report which is reviewed by the Executive Management Board and investment and proactive operational maintenance initiatives, however ODI Board. the ODI target for 2016/17 has been missed in both categories with • For the Retail ODI A2 (New Customer Relationship Management internal sewer flooding within the penalty deadband. We observe that system) penalties under the operation element could in principle the sewer flooding targets are highly challenging. apply, if Gentrack were to be dropped for any reason (e.g. if a decision • Burst mains show an increase during 2016/17 with a summer peak was made to move BW to another system). Since Gentrack is working (May-July) in Asbestos Cement mains, and a larger winter peak (Oct- satisfactorily, there is no reason to anticipate this occurring, other than Jan) seen in Cast Iron mains with a return to wet conditions followed by as a business decision. We make the observation that SWW may wish colder weather. However, the overall number of bursts remains within to consider if there could be implications for adjustments in PR19 if the serviceability reference levels. We have observed similar trends Gentrack was abandoned during the period. relating to the winter peak in other companies within the South West. • We confirmed all asset Serviceability measures are ‘Stable’. • We confirmed all four asset Serviceability measures are ‘Stable’, • BW’s Supply interruption performance is at a historic low at however we note that the Water Infrastructure sub measure 1.94 mins/property. Unplanned Interruptions (<12 years) is outside the upper reference • BW’s leakage is on target. level for the second successive year and therefore moves to Marginal, although this does not affect the overall Water Infrastructure measure which remains as Stable. We draw attention to the risk of a third year of failure in DG3 performance may move this sub measure to Deteriorating and the overall Water Infrastructure measure will then move to Marginal in year 4. SWW has an action plan in place to improve performance. In our opinion, with appropriate implementation of the action plan, this should be beneficial to performance in the current year. • Supply interruption performance has improved with SWW’s interruptions per property as 0.221 hrs/prop compared to 0.42 hrs/prop in 2015/16 and has met the Performance Commitment for the year. • SWW’s leakage is on target for the calendar. • Compliance with water quality standards falls marginally short of the target at 99.96 Mean Zonal Compliance (target is 99.98%) but is within the penalty deadband. G D Hindley Technical Assurance Director, CH2M 13 July 2017

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Regulatory reporting

TABLE 1A – Income statement Regulatory Reporting

Adjustments Differences between Total statutory and Total appointed Statutory RAG definitions Non-appointed adjustments activities £m £m £m £m £m Revenue 562.452 5.057 9.985 (4.928) 557.524 Operating costs (328.099) (8.081) (9.421) 1.340 (326.759) Other operating income – 2.131 – 2.131 2.131

Operating profit 234.353 (0.893) 0.564 (1.457) 232.896

Other income – 1.041 1.041 – – Interest income 1.505 – 0.027 (0.027) 1.478 Interest expense (62.977) (2.082) – (2.082) (65.059) Other interest expense – (0.746) – (0.746) (0.746)

Profit before tax and fair value movements 172.881 (2.680) 1.632 (4.312) 168.569

Fair value gains/(losses) on financial instruments – – – – –

Profit before tax 172.881 (2.680) 1.632 (4.312) 168.569

UK Corporation tax (31.650) – (0.380) 0.380 (31.270) Deferred tax 9.000 0.402 0.013 0.389 9.389

Profit for the year 150.231 (2.278) 1.265 (3.543) 146.688

Dividends 213.100 – – – 213.100

The Company does not have any financial instruments accounted for at fair value through the income statement.

In line with Regulatory Accounting Guidelines (RAGs) the following adjustments between the statutory financial statements and Regulatory Reporting have been completed: Other Operating operating Other Interest Deferred Profit for Revenue costs income income expense Tax the year £m £m £m £m £m £m £m Revenue not recognised under IFRS as deemed uncollectable 7.103 (7.103) – – – – – Net income/operating cost allocations(1) (1.005) 1.005 – – – – – Classification of rental income (1.041) – 1.041 – – – Profit on disposal of fixed assets – (2.131) 2.131 – – – – Capitalised interest, depreciation and tax impacts – 0.148 – – (2.828) 0.402 (2.278) Pension interest allocation (other interest expense) – – – – 0.746 –

Net Adjustments 5.057 (8.081) 2.131 1.041 (2.082) 0.402 (2.278)

(1) Adjustments relate to power generation recognised as a reduction in operating costs for statutory purposes but as non-appointed income for Regulatory Reporting. In addition overhead costs recharged to a subsidiary for retail activities are netted off against the contract value in Regulatory Reporting to fairly reflect the cost of delivering the appointed business’s retail activities.

Non-appointed Activities outside of the appointed business include property searches, commission from plumbing and drainage insurance, moorings and fisheries, rental income from non-appointed properties and energy generation from non-appointed assets. Non-appointed operational costs include the element of depreciation on assets primarily used in the wholesale business and reflect investments in solar and wind turbine installations as well as hydro generation schemes.

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REGULATORY REPORTING

Regulatory reporting continued

TABLE 1B – Statement of comprehensive income

Adjustments Differences between Total statutory and Total appointed Statutory RAG definitions Non-appointed adjustments activities £m £m £m £m £m Profit for the year 150.231 (2.278) 1.265 (3.543) 146.688 Actuarial gains/(losses) on post employment plans (7.708) – (0.208) 0.208 (7.500) Other comprehensive income 5.075 – – – 5.075

Total comprehensive income for the year 147.598 (2.278) 1.057 (3.335) 144.263

Actuarial losses are allocated based on the deficit associated with the pension scheme member and applying this to the activities associated with their employment history weighted by the time spent in each role, consistent with the approach to allocating pension contributions.

Other comprehensive income relates to cashflow hedges held in the appointed business.

TABLE 1C – Statement of financial position The statement of financial position (on the subsequent page) reflects the balance sheet as at 31 March 2017.

Both statutory financial statements and Regulatory Reporting is based on International Financial Reporting Standards (IFRS) with the following adjustments to reflect the Regulatory Reporting Guidelines (RAGs).

Current/ Fixed Trade & other Capex Deferred income non-current assets payables creditors - G&C'S provisions Deferred tax Net assets £m £m £m £m £m £m £m Reallocation of capital creditors – 40.208 (40.208) – – – – Cumulative capitalised interest, depreciation and tax impact(1) (8.278) – – – – 1.416 (6.862) Deferred income reallocated to provisions – 2.157 – 102.393 (104.550) – –

Total (8.278) 42.365 (40.208) 102.393 (104.550) 1.416 (6.862)

(1) Cumulative capitalised interest of £8.486m and depreciation of £0.208m, including Bournemouth Water adjustment for capitalised interest.

Non Appointed Non-appointed fixed assets reflect investments in solar and wind installations as well as hydro generation schemes, fisheries and riverside land and the fair value of non-appointed leased assets. In addition investment to support tankered waste activities have been included within non-appointed assets.

Trade and other receivables reflect debt associated with non-appointed activities and trade payables are allocated based on operating costs.

Current tax liabilities represent the tax due on profits with deferred tax reflecting the capital allowances on fixed assets and the pension deficit.

Retirement benefit obligations are allocated based on the deficit associated with the pension scheme member and applying this to the activities within their employment history.

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TABLE 1C – Statement of financial position continued Regulatory Reporting

Adjustments Differences between Total statutory and Total appointed Statutory RAG definitions Non-appointed adjustments activities £m £m £m £m £m Non-current assets Fixed assets 2,899.815 (8.278) 5.594 (13.872) 2,885.943 Intangible assets 52.797 – – – 52.797 Investments – other 3.300 – – – 3.300

Total non-current assets 2,955.912 (8.278) 5.594 (13.872) 2,942.040

Current assets Inventories 5.302 – – – 5.302 Trade & other receivables 142.177 – 2.704 (2.704) 139.473 Financial instruments 0.006 – – – 0.006 Cash & cash equivalents 247.404 – 4.115 (4.115) 243.289

Total current assets 394.889 – 6.819 (6.819) 388.070

Current liabilities Trade & other payables (93.463) 42.365 (0.720) 43.085 (50.378) Capex creditor – (40.208) – (40.208) (40.208) Borrowings (158.342) – – – (158.342) Financial instruments (15.171) – – – (15.171) Current tax liabilities (12.250) – (0.274) 0.274 (11.976) Provisions (4.861) (2.157) – (2.157) (7.018)

Total current liabilities (284.087) – (0.994) 0.994 (283.093)

Net current assets/(liabilities) 110.802 – 5.825 (5.825) 104.977

Non-current liabilities Borrowings (2,122.903) – – – (2,122.903) Financial instruments (23.964) – – – (23.964) Retirement benefit obligations (32.276) – (0.404) 0.404 (31.872) Provisions – (102.393) – (102.393) (102.393) Deferred income – G&C’s (102.393) 102.393 – 102.393 – Deferred tax (219.988) 1.416 (0.249) 1.665 (218.323)

Total non-current liabilities (2,501.524) 1.416 (0.653) 2.069 (2,499.455)

Net assets 565.190 (6.862) 10.766 (17.628) 547.562

Equity Called up share capital 250.923 – – – 250.923 Retained earnings & other reserves 314.267 (6.862) 10.766 (17.628) 296.639

Total equity 565.190 (6.862) 10.766 (17.628) 547.562

Notes for the statement of financial position are shown on the previous page.

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Regulatory reporting continued

TABLE 1D – Statement of cash flows

Adjustments Differences between Total statutory and Total appointed Statutory RAG definitions Non-appointed adjustments activities £m £m £m £m £m Statement of cashflows Operating profit 234.353 (0.893) 0.564 (1.457) 232.896 Other income – 1.041 1.041 – – Depreciation 113.226 (0.148) 0.311 (0.459) 112.767 Amortisation 0.521 – – – 0.521 Changes in working capital (13.389) 4.481 – 4.481 (8.908) Pension contributions – (4.481) – (4.481) (4.481) Movement in provisions (1.884) – – – (1.884) Profit on sale of fixed assets (2.131) – – – (2.131)

Cash generated from operations 330.696 – 1.916 (1.916) 328.780

Net interest paid (46.961) (2.828) – (2.828) (49.789) Tax paid (31.678) – (0.406) 0.406 (31.272)

Net cash generated from operating activities 252.057 (2.828) 1.510 (4.338) 247.719

Investing activities Capital expenditure (183.273) 2.828 0.003 2.825 (180.448) Grants & Contributions 1.876 – – – 1.876 Disposal of fixed assets 2.350 – – – 2.350 Other 8.716 – – – 8.716

Net cash used in investing activities (170.331) 2.828 0.003 2.825 (167.506)

Net cash generated before financing activities 81.726 – 1.513 (1.513) 80.213

Cashflows from financing activities Equity dividends paid (213.100) – – – (213.100) Net loans received 119.770 – – – 119.770 Cash inflow from equity financing – – – – –

Net cash generated from financing activities (93.330) – – – (93.330)

Increase/(decrease) in net cash (11.604) – 1.513 (1.513) (13.117)

Commentary for the adjustments within the statement of cashflows to reconcile from the statutory financial statements to Regulatory Reporting, have been noted within the income statement.

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TABLE 1E – Net debt analysis Regulatory Reporting

Interest rate risk profile Fixed rate Floating rate Index linked Total £m £m £m £m Borrowings (excluding preference shares) 1,335.172 453.450 492.623 2,281.245 Preference share capital –

Total borrowings 2,281.245

Cash (25.237) Short term deposits (218.052)

Net debt 2,037.956

Gearing 61.93% Adjusted gearing 61.81%

Full year equivalent nominal interest cost 26.670 3.483 21.417 51.570 Full year equivalent cash interest payment 26.670 3.483 9.713 39.866

Indicative interest rates Indicative weighted average nominal interest rate 2.20% 0.80% 4.52% 2.43% Indicative weighted average cash interest rate 2.20% 0.80% 2.05% 1.88%

Weighted average years to maturity 19.08 16.89 31.91 21.51

South West Water does not have any preference share capital.

The table above reflects the position of the appointed business and excludes the £4.115m of non-appointed cash assumed within short-term deposits. RCV at 31 March 2017 was £3.290.7m resulting in a gearing ratio of 61.93% for the appointed business.

Fixed and floating debt costs and interest rates are equivalent to the cash interest payments. Only index-linked debt has a differential between the interest charges and cash interest payments, where RPI is accreted into the loan balance.

The adjusted gearing is based on the total cash position.

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Price review and other segmental reporting

TABLE 2A – Segmental income statement

Retail Wholesale Non- Water Water Wastewater Wastewater Household Household resources Network+ Water total Network+ Sludge total Total £m £m £m £m £m £m £m £m £m Revenue – price control 38.868 4.661 236.029 236.029 262.258 262.258 541.816 Revenue – non price control 0.107 0.753 3.404 3.404 1.823 1.823 6.087

Operating expenditure (30.178) (4.551) (11.334) (77.715) (89.049) (75.195) (14.424) (89.619) (213.397)

Depreciation – tangible fixed assets (1.493) (0.166) (2.979) (44.139) (47.118) (58.210) (5.854) (64.064) (112.841) Amortisation – intangible fixed assets (0.312) (0.035) – (0.174) (0.174) – – – (0.521) Other operating income – – 0.249 1.711 1.960 0.171 – 0.171 2.131

Operating profit before recharges 6.992 0.662 105.052 110.569 223.275

Recharges from other segments (1.187) (0.182) – – – – – – (1.369) Recharges to other segments – – 0.073 0.837 0.910 0.786 0.199 0.985 1.895

Operating profit 5.805 0.480 105.962 111.554 223.801

Surface water drainage rebates 2.070

Revenue Revenue within the price control above excludes certain grants and contributions which are noted in table 2I, including infrastructure and new connections income. The reconciliation below outlines the difference between table 1A, table 2A and table 2I. £m Total appointee revenue (Table 1A) 557.524 less: connections charges (4.594) infrastructure receipts (water and wastewater) (5.071) other adjustments 0.044

547.903

Retail revenue outside of the price control reflects non-household customers on non-default tariffs. Wholesale revenue outside the price control reflects fire hydrant charges, retailer of developer services income and standpipe hire within the water business unit, and developer activities within the wastewater business.

Operating Costs Operating costs (including depreciation) is based on the methodology outlined on page 58.

Other Operating Costs Profit on the sale of fixed assets (other operating income) has been allocated based on the underlying asset category which generated the sale, with management and general assets being split pro-rata between retail and wholesale.

Recharges Recharges to and from other segments reflect charges for the use of assets, and is equal to the depreciation charged. This reflects the recharges between appointed activities with costs associated with non-appointed activities already allocated in table 1A. Asset categories used across segments include:

• IS hardware, software and infrastructure • vehicles • sludge transportation.

Surface water rebates reflects 69,600 customers where there is no connection to the South West Water wastewater network for surface water i.e. rainwater which falls on an impermeable areas of a property such as its roof, drive, hard standing area or car park.

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TABLE 2B – Totex analysis – wholesale Regulatory Reporting

Water Wastewater Water resources Network+ Network+ Sludge Total £m £m £m £m £m Operating expenditure Power 2.654 12.981 14.610 1.268 31.513 Income treated as negative expenditure (0.492) (0.198) (0.004) (0.260) (0.954) Service charges/discharge consents 4.586 0.338 3.261 0.004 8.189 Bulk supply/bulk discharge – – – – – Other operating expenditure 2.874 44.185 49.381 12.652 109.092 Local authority and Cumulo rates 1.712 19.722 5.937 0.760 28.131

Total operating expenditure excluding third party services 11.334 77.028 73.185 14.424 175.971

Third party services – 0.687 2.010 – 2.697

Total operating expenditure 11.334 77.715 75.195 14.424 178.668

Capital expenditure Maintaining the long term capability of the assets – infra 0.596 10.999 15.829 – 27.424 Maintaining the long term capability of the assets – non-infra 0.085 41.330 44.143 9.716 95.274 Other capital expenditure – infra 2.400 16.054 15.155 – 33.609 Other capital expenditure – non-infra 0.388 12.216 10.955 0.010 23.569

Total gross capital expenditure excluding third party services 3.469 80.599 86.082 9.726 179.876 Third party services – 3.879 – – 3.879

Total gross capital expenditure 3.469 84.478 86.082 9.726 183.755

Grants and contributions – 8.096 3.861 – 11.957 Totex 14.803 154.097 157.416 24.150 350.466

Cash expenditure Pension deficit recovery payments – – – – – Other cash items – – – – –

Total Totex including cash items 14.803 154.097 157.416 24.150 350.466

Operating expenditure South West Water does not have any bulk supply or discharge costs. Third party services largely reflect costs associated with mains diversions.

Capital expenditure Reflects spend which is recognised within fixed assets as either new assets or maintenance spend associated with enhancing the long-term capability and life of existing assets. It excludes those assets adopted at fair value.

Grants & contributions allocations are based on the relevant connection charges, infrastructure charges, requisitioned mains and sewer connections, and are consistent with those recognised in table 2E.

Cash expenditure Pension deficit recovery payments reflect planned contributions which were advanced in 2015/16 and therefore there no payments were made this year.

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REGULATORY REPORTING

Price review and other segmental reporting continued

TABLE 2C – Operating cost analysis – retail

Household Non-Household Total £m £m £m Operating expenditure Customer services 9.761 1.132 10.893 Debt management 1.620 0.255 1.875 Doubtful debts 12.443 1.062 13.505 Meter reading 1.155 0.049 1.204 Services to developers – 0.478 0.478 Other operating expenditure 5.199 1.554 6.753

Total operating expenditure excluding third party services 30.178 4.530 34.708 Third party services operating expenditure – 0.021 0.021

Total operating expenditure 30.178 4.551 34.729 Depreciation – tangible fixed assets 1.493 0.166 1.659 Amortisation – intangible fixed assets 0.312 0.035 0.347

Total operating costs 31.983 4.752 36.735

Debt written off 13.732 0.875 14.607

Operating costs South West Water’s retail activities are largely undertaken by a wholly owned subsidiary Source Contact Management Limited. Cost allocations are based on the policy outlined on page 58 with a detailed methodology available from the website www.southwestwater.co.uk.

Further commentary on the performance of the retail business is included on page 34.

Depreciation Depreciation reflects the direct depreciation charged for assets used wholly or principally within the retail price controls. This includes:

• customer billing and account software • meter reading mobile software • debt initiatives.

Debt written off Debt written off is allocated based on the specific customers, excluding the costs associated with court and debt recovery activity. South West Water’s policy for debt write-off is included within the accounting disclosures on page 59.

Capital expenditure Capital expenditure recognised directly in the retail business includes:

• customer service improvement initiatives • information services support and costs • directly attributable transport costs.

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TABLE 2D – Historic cost analysis of fixed assets – wholesale & retail Regulatory Reporting

Wholesale Retail Water Water Wastewater Non- Resources Network+ Network+ Sludge Household Household Total £m £m £m £m £m £m £m Cost At 1 April 2016 112.446 1,534.314 2,179.087 125.254 18.949 1.927 3,971.977 Disposals (0.100) (1.681) (1.875) (0.154) – – (3.810) Additions 5.417 220.579 82.386 9.726 1.826 2.560 322.494 Assets adopted at nil cost – 2.413 22.167 – – – 24.580

At 31 March 2017 117.763 1,755.625 2,281.765 134.826 20.775 4.487 4,315.241

Depreciation At 1 April 2016 (29.466) (452.406) (754.429) (67.381) (14.723) (1.643) (1,320.048) Disposals 0.090 1.538 1.818 0.145 – – 3.591 Charge for the year (2.979) (44.139) (58.210) (5.854) (1.493) (0.166) (112.841)

At 31 March 2017 (32.355) (495.007) (810.821) (73.090) (16.216) (1.809) (1,429.298)

Net book amount at 31 March 2017 85.408 1,260.618 1,470.944 61.736 4.559 2.678 2,885.943

Net book amount at 1 April 2016 82.980 1,081.908 1,424.658 57.873 4.226 0.284 2,651.929

Depreciation charge for year Principal services (2.979) (44.139) (58.210) (5.854) (1.493) (0.166) (112.841) Third party services – – – – – – –

Total (2.979) (44.139) (58.210) (5.854) (1.493) (0.166) (112.841)

The net book value includes £162.4m in respect of assets in the course of construction.

Out of the total depreciation charge for the Company of £115.8m, the sum of £1.5m has been charged to capital projects, £1.5m has been offset by deferred income and £112.8m against profits.

Fixed assets have been allocated based upon their principle use. For assets which are used across these (i.e. management and general), they have been assumed to have principle use within wholesale and are then allocated between water and wastewater.

Retail assets reflect those principally used within the retail business. These are then allocated between household and non-household in line with our established methodology.

Additions in the year include assets adopted at fair value from customers and developers in line with IFRIC18 and include those recognised at their fair value.

The total fair value of adopted assets additions in the year were £2.4m in water and £22.2m in wastewater which includes additions of £18.7m private sewer pumping stations transferred from customers from 1 October 2016. In total, cumulative adopted assets have a value of £104.4m.

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REGULATORY REPORTING

Price review and other segmental reporting continued

TABLE 2E – Analysis of capital contributions and land sales – wholesale

Current year Capitalised Fully recognised and amortised in income (in income Fully netted statement statement) off capex Total £m £m £m £m Grants and contributions – water Connection charges (s45) 4.584 – – 4.584 Infrastructure charge receipts (s146) 3.156 – – 3.156 Requisitioned mains (s43, s55 & s56) 0.111 – 0.245 0.356 Diversions (s185) 1.107 – – 1.107 Other contributions 0.280 – – 0.280

Total 9.238 – 0.245 9.483

Value of adopted assets 2.413 2.413

Grants and contributions – wastewater Infrastructure charge receipts (s146) 2.332 – – 2.332 Requisitioned sewers (s100) 0.103 – 1.426 1.529 Diversions (s185) 1.395 – – 1.395 Other contributions 0.101 – 0.015 0.116

Total 3.931 – 1.441 5.372

Value of adopted assets 22.167 22.167

Contributions are principally received from developers in respect of both new connections which are recognised in the income statement and requisitioned mains/sewers which are netted from the capital expenditure of the related assets. Other contributions include other funding from organisations and assets adopted at fair value.

The value of adopted assets includes £18.7m private sewer pumping stations transferred by customers from 1 October 2016.

Current year Water Wastewater Total £m £m £m Movements in capitalised grants and contributions Brought forward 0.338 – 0.338 Capitalised in year – – – Amortisation (in income statement) (0.207) – (0.207)

Carried forward 0.131 – 0.131

Land sales Proceeds from disposals of protected land 1.660 0.042 1.702

Total outstanding grants and contributions of £0.131m are due to be released within one year and therefore has been included in table 1C under current liabilities (provisions) alongside £2.026m relating to deferred income on adopted assets. There is no non-current deferred income – G&C’s within table 1C.

Disposals of land have been allocated based on principal site location in line with previously reported figures. No individual sale was above £0.500m and no sales were made to any associated company.

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TABLE 2F – Household – revenues by customer type for South West Water Regulatory Reporting

Average household retail Wholesale Retail Total Number of revenue per charges revenue revenue revenue customers customer £m £m £m (000s) £ Unmeasured water only customer 11.762 1.276 13.038 31.753 40.185 Unmeasured wastewater only customer 0.895 0.091 0.986 2.293 39.686 Unmeasured water and wastewater customer 86.422 6.060 92.482 109.847 55.168 Measured water only customer 9.559 1.299 10.858 36.670 35.424 Measured wastewater only customer 0.487 0.077 0.564 2.447 31.467 Measured water and wastewater customer 244.273 25.126 269.399 565.026 44.469

Total 353.398 33.929 387.327 748.036 45.357

Numbers of customers relates specifically to the number of properties that are charged at a specific tariff band rate.

TABLE 2F – Household – revenues by customer type for Bournemouth Water

Average household Wholesale Retail Total Number of revenue per charges revenue revenue revenue customers customer £m £m £m (000s) £ Unmeasured water only customer 7.447 1.485 8.932 54.656 27.170 Measured water only customer 14.201 3.453 17.654 136.687 25.262

Total 21.648 4.938 26.586 191.343 25.807

Numbers of customers relates specifically to the number of properties that are charged at a specific tariff band rate.

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REGULATORY REPORTING

Price review and other segmental reporting continued

TABLE 2G – Non-household water – revenues by customer type for South West Water

Average non-household Wholesale Retail Total Number retail revenue charges revenue revenue revenue of connections per connection £m £m £m (000s) £ Non-default tariffs Total non-default tariffs 6.744 0.294 7.038 1.932 152

Default tariffs Standard Unmeasured Water 1.202 0.059 1.261 2.156 27 Standard Measured Water 39.916 1.881 41.797 60.861 31 Large & Special User 50-100ML Water 1.859 0.048 1.907 0.014 3,429 Large & Special User 100-250ML Water 4.231 0.110 4.341 0.017 6,471 Large & Special User 250+ML Water 0.945 0.025 0.970 0.002 12,500 Large & Special User Special Agreements Water – – – 0.060 –

Total default tariffs 48.153 2.123 50.276 63.110 34

Total 54.897 2.417 57.314 65.042 37

Average non-household Number retail revenue of customers per connection (nr) £ Revenue per customer Total 65.042 37

Numbers of customers relates specifically to the number of properties that are charged at a specific tariff band rate. The ‘total’ average non-household retail revenue per customer of £37 represents the average retail water revenue per customer across water non-household retail customers.

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TABLE 2G – Non-household water – revenues by customer type for Bournemouth Water Regulatory Reporting

Default tariffs Standard Unmeasured Water 0.272 0.018 0.290 1.129 16 Standard Measured Water 1.559 0.329 1.888 10.182 32 Large & Special User 50-100ML Water 1.373 0.024 1.397 0.983 24 Large & Special User 100-250ML Water 1.073 0.062 1.135 0.352 176 Large & Special User 250+ML Water 1.486 0.104 1.590 0.242 430 Large & Special User Special Agreements Water 1.050 0.054 1.104 0.067 806 Large & Special User Special Agreements Water 0.292 0.008 0.300 0.004 2,000

Total default tariffs 7.105 0.599 7.704 12.959 46

Total 11.352 0.793 12.145 12.960 61

Average non-household Number retail revenue of customers per connection (nr) £ Revenue per customer Total 12.960 61

Numbers of customers relates specifically to the number of properties that are charged at a specific tariff band rate. The ‘total’ average non-household retail revenue per customer of £61 represents the average retail water revenue per customer across water non-household retail customers.

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REGULATORY REPORTING

Price review and other segmental reporting continued

TABLE 2H – Non-household wastewater – revenues by customer type for South West Water

Default tariffs Standard Unmeasured Sewerage 1.966 0.082 2.048 2.282 36 Standard Measured Sewerage 36.704 1.447 38.151 39.860 36 Large & Special User 50-100ML Sewerage 1.087 0.027 1.114 0.014 1,929 Large & Special User 100-250ML Sewerage 1.889 0.047 1.936 0.016 2,938 Large & Special User 250+ML Sewerage 0.973 0.024 0.997 0.002 12,000 Large & Special User Special Agreements Sewerage 1.479 0.061 1.540 0.062 984 Trade Effluent 6.305 0.199 6.504 0.399 499

Total default tariffs 50.403 1.887 52.290 42.635 44

Total 56.992 2.152 59.144 43.684 49

Average non-household Number retail revenue of customers per connection (nr) £ Revenue per customer Total 43.684 49

Numbers of customers relates specifically to the number of properties that are charged at a specific tariff band rate. The ‘total’ average non-household retail revenue per customer of £49 represents the average retail wastewater revenue per customer across wastewater non-household retail customers.

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TABLE 2I – Revenue analysis & wholesale control reconciliation for South West Water Regulatory Reporting

Household Non-Household Total £m £m £m Wholesale charge – water Unmeasured 43.845 1.202 45.047 Measured 104.287 53.694 157.981 Third party revenue – – – Total 148.132 54.896 203.028

Wholesale charge – wastewater Unmeasured 55.234 1.966 57.200 Measured 150.032 55.026 205.058 Third party revenue – – – Total 205.266 56.992 262.258

Wholesale total 353.398 111.888 465.286

Retail revenue Unmeasured 7.427 0.141 7.568 Measured 26.502 3.920 30.422 Other third party revenue – – – Retail total 33.929 4.061 37.990

Third party revenue – non-price control Bulk supplies – water 0.030 Bulk supplies – wastewater – Other third party revenue 4.022 Total third party revenue - non-price control 4.052

Principal services – non-price control Other appointed revenue 0.559 Total appointed revenue 507.887

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REGULATORY REPORTING

Price review and other segmental reporting continued

TABLE 2I – Revenue analysis & wholesale control reconciliation for South West Water continued

Third party revenue within the price control reflects income on development planning and third party revenue outside the controls includes mains and sewer diversions, standpipe hire and other rechargeable works.

Bulk supplies relate to treated water supplies to the neighbouring water company.

Appointed revenue outside of the price control reflects retail revenue for non-household customers on non-default tariffs as noted in table 2A.

Water Wastewater Total £m £m £m Wholesale revenue governed by price control 203.028 262.258 465.286 Grants & contributions 6.718 3.861 10.579 Total revenue governed by wholesale price control 209.746 266.119 475.865 Amount assumed in wholesale determination 203.205 262.221 465.426 Adjustment for in-period ODI revenue – – – Adjustment for WRFIM – – – Total assumed revenue 203.205 262.221 465.426 Difference 6.541 3.898 10.439

For 2016/17 there were no adjustments to the allowed revenue during tariff setting. Commentary on appointed revenue and the comparison with the 2014 Financial Determination is included on page 32.

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TABLE 2I – Revenue analysis & wholesale control reconciliation for Bournemouth Water Regulatory Reporting

Household Non-Household Total £m £m £m Wholesale charge – water Unmeasured 7.447 0.272 7.719 Measured 14.201 6.834 21.035 Third party revenue – 4.247 4.247 Total 21.648 11.353 33.001

Wholesale total 21.648 11.353 33.001

Retail revenue Unmeasured 1.485 0.018 1.503 Measured 3.453 0.582 4.035 Other third party revenue – – – Retail total 4.938 0.600 5.538

Third party revenue – non-price control Bulk supplies – water – Other third party revenue 1.283 Total third part revenue - non-price control 1.283

Principal services – non-price control Other appointed revenue 0.194 Total appointed revenue 40.016

Third party revenue within the price control reflects income on development planning and third party revenue outside the controls includes standpipe hire and other rechargeable works.

Bulk supplies relate to treated water supplies to the neighbouring water company.

Appointed revenue outside of the price control reflects retail revenue for non-household customers on non-default tariffs as noted in table 2A.

Water Total £m £m Wholesale revenue governed by price control 33.001 33.001 Grants & contributions 1.378 1.378 Total revenue governed by wholesale price control 34.379 34.379 Amount assumed in wholesale determination 34.903 34.903 Adjustment for in-period ODI revenue – – Adjustment for WRFIM – – Total assumed revenue 34.903 34.903 Difference (0.524) (0.524)

For 2016/17 there were no adjustments to the allowed revenue during tariff setting. Commentary on appointed revenue and the comparison with the 2014 Financial Determination is included on page 32.

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REGULATORY REPORTING

Performance summary

TABLE 3A – Outcome performance table for South West Water (2012/13 price base)

Total AMP6 2016-17 reward 2016-17 notional Total AMP6 reward or penalty 2016-17 2016-17 reward or penalty 2016-17 notional reward or penalty reward or penalty 31 March 2020 performance level 2016-17 or penalty (in-period ODIs) reward or accrued 31 March 2020 forecast See Units – actual CPL met? (in-period ODIs) £m (4 DPs) penalty accrued £m (4 DPs) forecast £m (4 DPs) Page W-A1 Compliance with water quality standard % 99.96 No Penalty deadband 0.000 N/A N/A N/A N/A 12 W-A2 Taste, smell and colour contacts nr/1,000 pop' 2.70 Yes Reward deadband 0.000 N/A N/A N/A N/A 12 W-A3 Asset reliability (pipes) category Stable Yes N/A N/A N/A N/A N/A N/A 12 W-A4 Asset reliability (process) category Stable Yes N/A N/A N/A N/A N/A N/A 12 W-A5 Duration of interruptions in supply (hours/property) time 0.221 Yes N/A N/A Reward 0.1366 Penalty (0.8064) 12 W-B1 Water restrictions placed on customers (number) nr 0 Yes N/A N/A Reward 1.6240 Reward 3.2480 16 W-B2 Ability to move water around the network text Partial N/A N/A N/A N/A N/A N/A N/A * W-B3 Leakage levels (megalitres a day, Ml/d) nr 82 Yes Reward 0.8060 0N/A N/A Reward 0.8060 16 W-B4 Time taken to fix significant leaks (days) nr 2.23 N/A N/A N/A N/A N/A N/A N/A 16 W-B5 Security of Supply Index (SoSI) score 100 N/A N/A N/A N/A N/A N/A N/A 16 W-C1 Supplies interrupted due to flooded South West Water sites nr 0 N/A N/A N/A N/A N/A N/A N/A 20 W-D1 Operational customer contacts resolved first time (%) % 95.5 Yes Reward 0.1505 N/A N/A Reward 0.3135 18 W-E1 Sustainable abstractions (EA/WFD classification) nr 0 N/A N/A N/A N/A N/A N/A N/A 24 W-E2 Sustainable abstractions (Environment Agency water stress status) category Moderate Yes N/A N/A N/A N/A N/A N/A 24 W-E3a Catchment management (number of acres) nr 7,568 N/A N/A N/A N/A N/A N/A N/A 00 W-E3b Catchment management (number of farms) nr 1,056 N/A N/A N/A N/A N/A N/A N/A 00 W-E4 Pollution incidents (category 1 and 2) nr 0 Yes N/A N/A N/A N/A N/A N/A 24 W-E5 Pollution incidents (category 3 and 4) nr 9 No Penalty (0.0220) N/A N/A Penalty (0.0440) 24 W-E6 Operational carbon emissions (ktCO2e) nr 67.2 N/A N/A N/A N/A N/A N/A N/A 24 W-E7 Energy from renewable sources (%) % 5.61 N/A N/A N/A N/A N/A N/A N/A 24 W-F1 Customers paying a metered bill % 80.8 No N/A N/A Penalty deadband 0.0000 Penalty (0.2140) 30 S-A1 Internal sewer flooding incidents nr 165 No N/A N/A Penalty deadband 0.0000 N/A N/A 21 S-A2 External sewer flooding incidents nr 3,504 No N/A N/A Penalty (0.2840) Penalty (0.5260) 21 S-A3 Odour contacts (wastewater treatment works) nr 278 Yes N/A N/A Reward 0.1936 Reward 0.5416 21 S-A4 Asset reliability (pipes) category Stable Yes N/A N/A N/A N/A N/A N/A 22 S-A5 Asset reliability (process) category Stable Yes N/A N/A N/A N/A N/A N/A 22 S-A6 Compliance with sludge standard (%) % 100 Yes N/A N/A N/A N/A N/A N/A 21 S-B1 Operational customer contacts resolved first time (%) % 89.9 No Penalty (0.1071) N/A N/A Penalty (0.2500) 18 S-C1 Wastewater treatment numeric compliance (%) % 98.4 N/A N/A N/A N/A N/A N/A N/A 24 S-C2 Wastewater population equivalent sanitary compliance (%) % 99.9 N/A N/A N/A N/A N/A N/A N/A 24 S-C3 Wastewater descriptive works permit compliance (%) % 99.4 No Penalty deadband 0.000 N/A N/A N/A N/A 24 S-C4 Pollution incidents (category 1 and 2) nr 4 No Penalty (0.6920) N/A N/A Penalty (2.4220) 24 S-C5 Pollution incidents (category 3 and 4) nr 252 No Penalty (0.4272) N/A N/A Penalty (0.4272) 24 S-C6 Operational carbon emissions (ktCO2e) nr 85.9 N/A N/A N/A N/A N/A N/A N/A 24 S-C7 Energy from renewable sources (%) % 2.75 N/A N/A N/A N/A N/A N/A N/A 24 S-D1 Bathing water quality (non-compliant waters due to SWW assets**) nr 0 Yes N/A N/A Reward 2.2410 Reward 5.2290 26 S-D2 Combined sewer overflow spills (number)* nr N/A N/A N/A N/A N/A N/A N/A N/A * S-D3 River water quality improved (km) nr 68 N/A N/A N/A N/A N/A N/A N/A 26 R-A1 Customer overall satisfaction (%) % 89 N/A N/A N/A N/A N/A N/A N/A 18 R-A2 Service incentive mechanism (SIM) score 81.6 N/A N/A N/A N/A N/A N/A N/A 18 R-A3 Customer satisfaction with value for money (%) % 61 N/A N/A N/A N/A N/A N/A N/A 18 R-B1 Customers assisted by water poverty initiatives nr 28,409 N/A N/A N/A N/A N/A N/A N/A 30

Based on the ODI performance for the year £3.622m of net reward has been recognised with £0.290m (net penalty) assumed accrued for ‘in period’ adjustments and £3.912m (net reward) adjusted within the RCV. Rewards or penalties at 31 March 2017 have been calculated using the incentive rates and definitions consistent with Ofwat’s ‘Setting price controls for 2015-20. Final price control determination notice: company-specific appendix – South West Water’. Incentive values and rates are presented using 2012-13 prices.

* Measure to be developed for the 2020-2025 period. ** The number of bathing waters failing the EU Bathing Water Directive (more stringent Directive from 2015) where failure was allocated to South West Water by the Environment Agency, therefore no direct comparable 2014-15 performance level is available. The number of non-compliant bathing waters is expressed here as an absolute number, whereas in the 2014 Final Determination it is expressed as a negative number.

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TABLE 3A – Outcome performance table for South West Water Regulatory Reporting (2012/13 price base)

Based on the ODI performance for the year £3.622m of net reward has been recognised with £0.290m (net penalty) assumed accrued for ‘in period’ Total AMP6 forecast at March 2020 reflects the cumulative rewards and penalties achieved in the first two years of the regulatory period. adjustments and £3.912m (net reward) adjusted within the RCV. Rewards or penalties at 31 March 2017 have been calculated using the incentive Forecasts for the remaining three years have not been included, however South West Water remains on track to deliver 2020 targets and rates and definitions consistent with Ofwat’s ‘Setting price controls for 2015-20. Final price control determination notice: company-specific appendix is focused on delivering improvements for customers and the environment. – South West Water’. Incentive values and rates are presented using 2012-13 prices.

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REGULATORY REPORTING

Performance summary continued

TABLE 3A – Outcome performance table for Bournemouth Water (2012/13 price base)

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TABLE 3A – Outcome performance table for Bournemouth Water Regulatory Reporting (2012/13 price base)

Total AMP6 forecast at March 2020 reflects the cumulative rewards and penalties achieved in the first two years of the regulatory period. Forecasts for the remaining three years have not been included, however South West Water remains on track to deliver 2020 targets and is focused on delivering improvements for customers and the environment.

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REGULATORY REPORTING

Performance summary continued

TABLE 3B – Sub-measure performance table for South West Water

2016-17 performance level Unit – actual 2016-17 CPL met? W-A3(i) Asset reliability (pipes) – Total bursts category Stable Yes W-A3(ii) Asset reliability (pipes) – Interruptions > 12 hours category Marginal No W-A3(iii) Asset reliability (pipes) – Iron non-compliance category Stable Yes W-A3(iv) Asset reliability (pipes) – DG2 Pressure category Stable Yes W-A3(v) Asset reliability (pipes) – Customer contacts - discolouration category Stable Yes W-A3(vi) Asset reliability (pipes) – Distribution index TIM* category Stable Yes W-A4(i) Asset reliability (process) – WTW coliforms non-compliance category Stable Yes W-A4(ii) Asset reliability (process) – Service reservoir coliforms non-compliance category Stable Yes W-A4(iii) Asset reliability (process) – Turbidity non-compliance category Stable Yes W-A4(iv) Asset reliability (process) – Enforcement incidents category Stable Yes W-A4(v) Asset reliability (process) – Unplanned maintenance category Stable Yes S-A4(i) Asset reliability (pipes) – Sewer collapses category Stable Yes S-A4(ii) Asset reliability (pipes) – Pollution incidents (CSO+RM+FS) category Stable Yes S-A4(iii) Asset reliability (pipes) – Properties flooded due to other causes category Stable Yes S-A4(iv) Asset reliability (pipes) – Properties flooded due to overloaded sewers** category Stable Yes S-A4(v) Asset reliability (pipes) – Sewer blockages category Stable Yes S-A4(vi) Asset reliability (pipes) – Equipment failures category Stable Yes S-A5(i) Asset reliability – Sewage Treatment works (STW) category Stable Yes S-A5(ii) Asset reliability – Population equivalent (PE) category Stable Yes S-A5(iii) Unplanned maintenance category Stable Yes

All sub measures are in respect of South West Water's Asset Reliability measures shown in table 3A. All sub-measures are stable, except for the supply interruptions >12 months which is marginal (2015/16: marginal). South West Water have planned a number of targeted interventions and operational change initiatives, which are expected to return performance to 'stable' over the coming year. TABLE 3B – Sub-measure performance table for Bournemouth Water

2016-17 performance level Unit – actual 2016-17 CPL met? Serviceability of assets – infrastructure: Total bursts category Stable Yes Serviceability of assets – infrastructure: Interruptions > 12 hours category Stable Yes Serviceability of assets – infrastructure: Iron non-compliance (as 100-Mean Zonal) category Stable Yes Serviceability of assets – infrastructure: DG2 pressure category Stable Yes Serviceability of assets – infrastructure: Customer contacts - discolouration category Stable Yes Serviceability of assets – non-infrastructure: Water treatment works coliforms non-comp' category Stable Yes Serviceability of assets – non-infrastructure: Service reservoir coliforms non-compliance category Stable Yes Serviceability of assets – non-infrastructure: Turbidity category Stable Yes Serviceability of assets – non-infrastructure: Enforcement incidents category Stable Yes Serviceability of assets – non-infrastructure: Unplanned maintenance category Stable Yes

TABLE 3C AIM table is not applicable to South West Water Limited in either the original South West Water area or the Bournemouth Water area.

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TABLE 3D – SIM table for South West Water Regulatory Reporting

Units Score

Qualitative performance 1st survey score score 4.23 2nd survey score score 4.11 3rd survey score score 4.46 4th survey score score 4.33

Qualitative SIM score (out of 75) score 61.5

Quantitative performance Quantitative composite score score 98.2

Quantitative SIM score (out of 25) calc 20.1

SIM score

Total annual SIM score (out of 100) calc 81.6

TABLE 3D – SIM table for Bournemouth Water

Units Score

Qualitative performance 1st survey score score 4.30 2nd survey score score 4.52 3rd survey score score 4.45 4th survey score score 4.44

Qualitative SIM score (out of 75) calc 64.1

Quantitative performance Quantitative composite score score 55.7

Quantitative SIM score (out of 25) calc 22.2

SIM score

Total annual SIM score (out of 100) calc 86.3

SIM (Service Incentive Mechanism), an industry-wide measure of customer service, performance has improved in both operational areas. See pages 30 to 31 for further details concerning our customer service performance.

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Additional regulatory information

TABLE 4A – Non-financial information for South West Water

Current year Unmeasured Measured Retail household Number of void households (000s) 5.563 6.773 Per capita consumption (excluding supply pipe leakage) l/h/d 185.932 118.903

Water Wastewater Ml/d Ml/d Wholesale volume Bulk supply export 0.056 – Bulk supply import – – Distribution input 427.851

TABLE 4A – Non-financial information for Bournemouth Water

Current year Unmeasured Measured Retail household Number of void households (000s) 0.668 1.183 Per capita consumption (excluding supply pipe leakage) l/h/d 159.450 136.11

Water Ml/d Wholesale volume Bulk supply export 1.110 Bulk supply import 0.060 Distribution input 141.51

Bulk supply exports relate to the supply of treated water to the neighbouring water company.

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TABLE 4B – Wholesale totex analysis Regulatory Reporting

Current year Cumulative 2015-20 Water Wastewater Water Wastewater £m £m £m £m Actual totex Actual totex 168.900 181.566 303.245 337,905

Items excluded from the menu Third party costs 4.566 2.010 8.712 4.357 Pension deficit recovery payments – – 9.207 7.467 Other ‘Rule book’ adjustments – – – –

Total items excluded from the menu 4.566 2.010 17.919 11.824

Transition expenditure Transition expenditure – – – –

Adjusted actual totex Adjusted actual totex 164.334 179.556 285.326 326.081 Adjusted actual totex base year prices 151.735 165.790 265.844 303.979

Allowed totex Allowed totex based on final menu choice – base year prices (inclusive of pension deficit payments) 181.706 197.000 356.742 392.665

Actual totex in base year prices is calculated using actual average inflation, of 2.1% for 2016/17.

Commentary on the difference between actual totex and that allowed within the 2014 Final Determination is included on page 33.

Third party costs include both operational and capital expenditure consistent with table 2B.

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Additional regulatory information continued

TABLE 4C – Forecast impact of performance on RCV

Water Wastewater For the 12 months ended 31 March 2017 £m £m RCV determined at FD at 31 March 1,501.115 1,789.562 RCV element of cumulative totex over/underspend so far in the price control period (28.668) (40.022) Adjustment for ODI rewards or penalties (1.105) 5.681

Projected ‘shadow’ RCV 1,471.342 1,755.220

RCV element of totex underspend is based on specific pay-as-you-go ratios.

Water Wastewater Total Pay-as-you-go (PAYG) % 61.7% 49.8% Totex outperformance (outturn prices) 74.852 79.726 154.578 RCV impact (£m) 28.668 40.022 68.690

Totex outperformance excludes the pension deficit contributions and non-underlying exceptional items, as this is not deemed to impact the RCV. The adjustment is inflated into outturn prices, based on the rates assumed for RCV.

Pay-as-you-go rates are based on those included within the 2014 Final Determination, with water PAYG reflecting the weighted average cumulative PAYG ratio for South West Water and Bournemouth Water totex allowances.

South West Water has 11 outcome delivery incentives (ODIs) which are recognised as adjustments to RCV. Detailed analysis of ODI performance is included in table 3A and commentary is included throughout the Annual Performance Report.

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TABLE 4D – Wholesale totex analysis – water Regulatory Reporting

Water resources Network+ Treated Abstraction Raw water Raw water Raw water Water water licences abstraction transport storage treatment distribution Total Operating expenditure Power – 2.654 1.364 – 9.495 2.122 15.635 Income treated as negative expenditure – (0.492) (0.090) – (0.080) (0.028) (0.690) Abstraction charges 4.586 – 0.277 – 0.058 0.003 4.924 Bulk supply – – – – – – – Other operating expenditure 0.041 2.833 1.351 0.001 18.396 24.437 47.059 Local authority and Cumulo rates – 1.712 0.502 – 2.212 17.008 21.434

Total operating expenditure excluding third party services 4.627 6.707 3.404 0.001 30.081 43.542 88.362

Third party services – – – – – 0.687 0.687

Total operating expenditure 4.627 6.707 3.404 0.001 30.081 44.229 89.049

Capital expenditure Maintaining the long term capability – 0.596 0.229 – – 10.770 11.595 of the assets – infra Maintaining the long term capability – 0.085 0.582 – 26.999 13.749 41.415 of the assets – non-infra Other capital expenditure – infra – 2.400 – – – 16.054 18.454 Other capital expenditure – non-infra – 0.388 – – 8.445 3.771 12.604

Total gross capital expenditure (excluding third party) – 3.469 0.811 – 35.444 44.344 84.068

Third party services – – – – – 3.879 3.879

Total gross capital expenditure – 3.469 0.811 – 35.444 48.223 87.947

Grants and contributions – – – – – 8.096 8.096

Totex 4.627 10.176 4.215 0.001 65.525 84.356 168.900

Cash expenditure Pension deficit recovery payments – – – – – – – Other cash items – – – – – – –

Totex including cash items 4.627 10.176 4.215 0.001 65.525 84.356 168.900

The approach to allocating costs between the water services is outlined on page 58 with a detailed methodology available on our website.

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Additional regulatory information continued

TABLE 4D – Wholesale totex analysis – water continued

Water resources Network+ Abstraction Raw water Raw water Raw water Water Treated licences abstraction transport storage treatment water distribution Unit cost information (operating expenditure)

Licenced volume available (Ml) 386,748.312 Volume abstracted (Ml) 166,534.844 Volume transported (Ml) 166,534.844 Average volume stored (Ml) – Distribution input volume – water treatment (Ml) 156,309.149 Distribution input volume – treated water (Ml) 156,309.099

Unit cost (£/Ml) 11.964 40.274 20.440 – 192.446 282.959

Population (000s) 2,186.714 2,186.714 2,186.714 2,186.714 2,186.714 2,186.714

Unit cost (£/pop) 2.116 3.067 1.557 – 13.756 20.226

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TABLE 4E – Wholesale totex analysis – wastewater Regulatory Reporting

Network+ Sewage collection Network+ Sewage treatment Sludge Sewage Surface water Highway treatment Sludge liquor Sludge Sludge Sludge Foul drainage drainage and disposal treatment transport treatment disposal Total £m £m £m £m £m £m £m £m £m Operating expenditure Power 3.930 1.034 0.207 8.347 1.092 – 1.270 (0.002) 15.878 Income treated as negative expenditure – – – (0.004) – – (0.260) – (0.264) Discharge consents 0.601 0.158 – 2.502 – – 0.002 0.002 3.265 Bulk discharge – – – – – – – – – Other operating expenditure 17.814 4.689 0.940 25.742 0.196 3.047 6.611 2.994 62.033 Local authority rates and Cumulo rates 0.111 0.029 – 5.797 – – 0.760 – 6.697

Total operating expenditure excluding third party services 22.456 5.910 1.147 42.384 1.288 3.047 8.383 2.994 87.609

Third party services 1.560 0.410 – 0.040 – – – – 2.010

Total operating expenditure 24.016 6.320 1.147 42.424 1.288 3.047 8.383 2.994 89.619

Capital expenditure Maintaining the long term 12.044 3.170 0.615 – – – – – 15.829 capability of the assets – infra Maintaining the long term 5.867 1.544 0.300 35.367 1.065 2.099 5.575 2.042 53.859 capability of the assets – non-infra Other capital 11.531 3.035 0.589 – – – – – 15.155 expenditure – infra Other capital 0.529 0.139 0.027 9.960 0.300 0.002 0.006 0.002 10.965 expenditure – non-infra Total gross capital expenditure (excluding third party services) 29.971 7.888 1.531 45.327 1.365 2.101 5.581 2.044 95.808

Third party services – – – – – – – – – Total gross capital expenditure 29.971 7.888 1.531 45.327 1.365 2.101 5.581 2.044 95.808

Grants and contributions 2.938 0.773 0.150 – – – – – 3.861

Totex 51.049 13.435 2.528 87.751 2.653 5.148 13.964 5.038 181.566

Cash expenditure Pension deficit recovery payments – – – – – – – – – Other cash items – – – – – – – – –

Totex including cash items 51.049 13.435 2.528 87.751 2.653 5.148 13.964 5.038 181.566

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Additional regulatory information continued

TABLE 4E – Wholesale totex analysis – wastewater continued

Sewage collection Sewage treatment Sludge Sewage Imported Surface water Highway treatment and sludge liquor Sludge Sludge Sludge Foul drainage drainage disposal treatment transport treatment disposal £m £m £m £m £m £m £m £m

Unit cost information (operating expenditure)

Volume collected – foul (Ml) 83,475.500 Volume collected – surface water drainage (Ml) 55,268.930 Volume collected – highway drainage (Ml) 49,012.070 BOD(1) – sewage treatment and disposal (tonnes) 38,464.700 BOD(1) – imported sludge liquor treatment (tonnes) 366,725.000 Volume transported – sludge transport (m3) 385,492.160 Dried solid mass treated – sludge treatment (ttds) 41,437.459 Dried solid mass disposed – sludge disposal (ttds) 38,608.108

Unit cost (£/unit) 287.701 114.350 23.402 1,102.933 3.512 7.904 202.305 77.548

Population (000s) 1,695.976 1,695.976 1,695.976 1,695.976 1,695.976 1,695.976 1,695.976 1,695.976

Unit cost (£/pop) 14.161 3.726 0.676 25.015 0.759 1.797 4.943 1.765

(1) Biochemical Oxygen Demand.

The approach to allocating costs between the water services is outlined on page 58 with a detailed methodology available on our website.

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TABLE 4F – Operating cost analysis – household retail Regulatory Reporting

Household unmeasured Household measured Water Wastewater Water and Water Wastewater Water and only only wastewater Total only only wastewater Total Total £m £m £m £m £m £m £m £m £m Operating expenditure Customer services 0.917 0.024 1.152 2.093 1.706 0.026 5.936 7.668 9.761 Debt management 0.152 0.004 0.191 0.347 0.283 0.004 0.986 1.273 1.620 Doubtful debts 1.169 0.031 1.468 2.668 2.174 0.033 7.568 9.775 12.443 Meter reading 0.257 0.004 0.894 1.155 1.155 Other operating expenditure 0.488 0.013 0.613 1.114 0.908 0.014 3.163 4.085 5.199

Total operating expenditure excluding third party 2.726 0.072 3.424 6.222 5.328 0.081 18.547 23.956 30.178 services Third party services operating expenditure – – – – – – – – –

Total operating expenditure 2.726 0.072 3.424 6.222 5.328 0.081 18.547 23.956 30.178

Depreciation – tangible fixed assets 0.137 0.003 0.175 0.315 0.276 0.004 0.898 1.178 1.493 Amortisation – intangible fixed assets 0.029 0.001 0.036 0.066 0.058 0.001 0.187 0.246 0.312

Total operating costs 2.892 0.076 3.635 6.603 5.662 0.086 19.632 25.380 31.983

Operating costs per customer type were allocated based on the number of customers within each type.

Total £m Demand-side efficiency and customer-side leaks analysis – Household Demand-side water efficiency – gross expenditure 0.049 Demand-side water efficiency – expenditure funded by wholesale –

Demand-side water efficiency – net retail expenditure 0.049

Customer-side leak repairs – gross expenditure 0.006 Customer-side leak repairs – expenditure funded by wholesale –

Customer-side leak repairs – net retail expenditure 0.006

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Additional regulatory information continued

TABLE 4G – Wholesale current cost financial performance

Water Wastewater Total £m £m £m Revenue 239.433 264.081 503.514 Operating expenditure (89.049) (89.619) (178.668) Capital maintenance charges (65.195) (102.381) (167.576) Other operating income 1.960 0.171 2.131

Current cost operating profit 87.149 72.252 159.401

Other income – – – Interest income 0.673 0.802 1.475 Interest expense (29.678) (35.381) (65.059) Other interest expense (0.340) (0.406) (0.746)

Current cost profit before tax and fair value movements 57.804 37.267 95.071

Fair value gains/(losses) on financial instruments – – –

Current cost profit before tax 57.804 37.267 95.071

The Company does not have any financial instruments accounted for at fair value through the income statement.

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TABLE 4H – Financial metrics Regulatory Reporting

Metric £m Net debt 2,037.956 Regulated equity 1,252.721 Regulated gearing (%) 61.93% Post tax return on regulated equity (%) 11.22% RORE (return on regulated equity) (%) 11.00% Dividend yield (%) 17.01%

Retail profit margin – household (%) 0.50%

Retail profit margin – non-household (%) (0.60)%

Credit rating n/a Return on RCV (%) 6.33% Dividend cover (dec) 0.69

Funds from operations (FFO) 256.627

Interest cover (cash) (dec) 6.15 Adjusted interest cover (cash) (dec) 3.28 FFO/debt (dec) 0.13

Effective tax rate (%) 18.55%

Free cash flow (RCF) 43.527

RCF/capex (dec) 0.24

Revenue and earnings Revenue (actual) 541.816 EBITDA (actual) 328.419

South West Water does not have a credit rating as this is not a licence requirement.

% Borrowings Proportion of borrowings which are fixed rate 58.53% Proportion of borrowings which are floating rate 19.88% Proportion of borrowings which are index linked 21.59%

Proportion of borrowings due within 1 year or less 6.94% Proportion of borrowings due in more than 1 year but no more than 2 years 2.10% Proportion of borrowings due in more than 2 years but no more than 5 years 10.79% Proportion of borrowings due in more than 5 years but no more than 20 years 33.87% Proportion of borrowings due in more than 20 years 46.30%

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Additional regulatory information continued

TABLE 4I – Financial derivatives

Interest rate Nominal value by maturity (net) Total value (weighted average) 1 to 2 2 to 5 Over 5 Nominal Mark to years years years value (net) Market Total Payable Receivable £m £m £m £m £m accretion £m % % Derivative type Interest rate swap (sterling) Floating to fixed rate (0.736) (33.643) (1.754) (36.133) (36.133) – 2.07 0.37

Total (0.736) (33.643) (1.754) (36.133) (36.133) –

Forward currency contracts Forward currency contracts YEN 0.005 – – 0.005 0.005 –

Total 0.005 – – 0.005 0.005 –

Total Total financial derivatives (0.731) (33.643) (1.754) (36.128) (36.128) –

South West Water has interest rate swaps which are used to swap fixed and floating rate debt. No swaps are made on index-linked debt or using index-linked swaps.

South West Water also has limited forward currency contracts used to fix the cost of certain purchases in respect of capital projects.

The table above has been compiled on the basis of swap value and maturity, rather than the underlying debt instrument.

The total swap value of £36.1m above, excludes accrued interest charges of £3.0m resulting in a total financial instrument liability of £39.1m.

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Cost allocation and transfer pricing

Services between the appointed business and associated companies Regulatory Reporting Under RAG 5, water and sewerage appointees have a duty to trade at arm’s length and to ensure that there is no cross-subsidy with respect to transactions between the appointed business and associated companies.

Following the introduction of binding revenue price controls, appointees are also required to ensure there is no cross-subsidy between price control units.

RAG 3.09 requires disclosures of all transactions (individually and not on an aggregated basis) to be made where any single transaction exceeds 0.5% of the turnover of South West Water’s appointed business (£2.79m). In addition to transactions which exceed this amount, South West Water has also voluntarily disclosed below a summary of all transactions with its associated companies and any transactions with companies, whereby certain directors of the Company have interests. Services provided by South West Water and recharged to the following associated companies

Turnover of associated company Value of services Service Company £m Terms of supply £m Group expenses Source Contact 9..9 Recharge of appropriate 1.3 Management Limited costs

Group expenses Source for Business 0.3 Recharge of appropriate – Limited costs

Administrative expense Peninsula Properties 0.3 Recharge of appropriate – Limited costs

Administrative expense Pennon Group Plc 11.6 Recharge of appropriate 0.5 costs

Administrative expense Peninsula Leasing Limited 0.1 Recharge of appropriate – costs

Services received by South West Water from the following associated companies

Turnover of associated company Value Service Company £m Terms of supply £m Billing and collection Source Contact 9.9 Other market testing/ 9.9 services Management Limited recharge of appropriate costs

Group expenses Pennon Group Plc 11.6 Recharge of appropriate 5.3 costs

Insurance premiums Peninsula Insurance 1.2 Recharge of appropriate 0.5 Limited costs

Property services Peninsula Properties 0.3 Other market testing 0.3 Limited

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Cost allocation and transfer pricing continued

Borrowings from associated companies

Principal amount Service £m Repayment date Interest rate Pennon Group Plc: 100.0 2017/18 1 month LIBOR + 1.0% loan

South West Water Finance Plc: 133.6 2040 6.83% (fixed until July 2040) loan notes 2040

South West Water Finance Plc: 267.2 2057 RPI + 1.99% index linked bond 2057

Peninsula Leasing Limited: 0.8 2017/18 to 2018/19 3.00% finance leases in respect of motor vehicles

Dividends paid to South West Water’s parent company Pennon Group Plc During the year South West Water paid a total of £213.1m (2015/16: £74.9m) in dividends to its parent company, Pennon Group Plc.

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